Oil's Wild Ride: A Simple (But Thorough) Guide
Peculiar times for Crude Oil are with us once again, this time in the form of a cocktail of issues surrounding geopolitics to a flu epidemic coming out of China. The commodity started the year on a high with the assassination of Iranian general Qassem Solemani sparking fears of retaliation and the start of the Third world war along with the supply disruptions in the region. Albeit a ghoulish thought, many oil exporting nations would have secretly welcomed this action as much needed relief to their nation’s exchequer who rely on the black stuff for much of their budget expenditures. However, the world has changed much from the decades past and the price rise may not have been as much as an oil bull would have hoped for, given the advent of the shale revolution, increasing supply by around 4 million bpd and the decrease in demand for oil from most developed nations.
The coronavirus which shook the world early this year has played a significant role in the drop of oil price, due to in part the reduction in demand due to the decline in travel both in China and internationally. Oil is down almost 25% from its January highs and still trade in the mid 50’s, but will it change over the course of the months which lay ahead? I believe OPEC will be instituting production cuts to prop up prices, although their actions may draw the ire of US president Donald Trump, who is currently in the process of re-election. I also believe the Strait of Hormuz which is the most important oil chokepoint is under threat from attacks by hostile forces ranging from the Houthi rebels to the Iranian regime thereby driving up oil prices due to supply disruptions.
Price of oil over the past six months.
Source: Macro Trends
There has been winners and losers in the currency markets , with the oil importing nations enjoying a period of cheap oil and hence their currencies not being weakened. Oil exporters however are facing a declining currency with their own imports for other products becoming more expensive with the prospect of inflation showing its ugly face. Countries like India that are already showing signs of economic stagnation could find themselves in a lot of trouble should oil rebound to the $70 mark and hence I am bearish on the Indian rupee’s prospects in the coming months. I am betting on a recovery in oil prices, although in the short term prices may fluctuate in the 50’s.