The near 30% rally in WTI Oil during the first quarter of 2019 is difficult to justify when taking into account the progressive concerns that are mounting regarding a global economic downturn. The rally has been supported by improved market confidence that efforts from OPEC+ have tightened the supply in the market, but whether this encouraging sentiment can continue would likely depend on whether Russia continues to support production cuts.
As
such, a result to an unprecedented 30% rally over the last quarter, the
commodity is going to enter the new quarter as a prime contender to suffer from
a market correction. The probability is high that fears over a deceleration in
world economic momentum will only get louder as the year progresses, meaning
Oil investors will need to re-assess into expectations what impact a global
slowdown will have on future demand. A plethora of evidence through data
releases from different economies across the globe has already pointed out that
a downturn in growth is impending – if the slowdown hasn’t already arrived.
Market perception
is that OPEC cuts are working but demand outlook at risk
One of
the major risks for the price of Oil in the second quarter is the increased
probability that world economic forecasts for 2019 will be revised lower. While
a great volume of noise in the Oil atmosphere is created around headlines
involving production, OPEC or even more recently OPEC+, it often gets
underlooked just how important Oil demand is for its valuation. Reduced demand
is a negative for Oil price and the prospect of further lower demand on global
economic health fears will risk re-igniting oversupply concerns that have
dominated headlines since the spectacular price crash first occurred in 2014,
despite repeated measures and attempts by OPEC and co to rebalance the market.
Iran waivers a
wildcard, Saudi Arabia to remain committed to output cuts
If you
were to take the contrarian view, there are a few reasons to remain optimistic
that Oil can resume its price rebound in Q2. This would however, include some
unpredictable risk elements around politics for a commodity that has
historically behaved with an extreme level of sensitivity to politics.
Waivers
on Iranian sanctions are set to expire over the coming months and if President
Trump adopts a hardline approach that results in the taps for Iranian Oil
supply being turned off, the subsequent change in the production outlook would
prove tempting for potential buyers. Venezuela is another market that has come
under the threat of sanctions following recent domestic unrest, while
suspicions remain that Saudi Arabia will maintain its underlying commitment
towards tightening the available supply of Oil to achieve stronger valuations
to help the Kingdom achieve its fiscal targets.
Do not
underestimate risk Trump speaking against Oil rally will have on future outlook
Another
factor that needs to be taken into account when factoring in potential risks
that can swing the hammer of the Oil price in either direction is President
Trump.
The
President of the United States has made it perfectly clear on numerous
occasions that his desire is for Oil prices to return to lower levels for a
prolonged period. He has already commented via social media feeds that the Oil
price is too high and while he might not be President of a nation that is
either a traditional member of OPEC nor OPEC+, he carries the ability to
influence world financial markets. When
it comes to President Trump’s influence on financial markets it is never an
occasion that investors can prepare for when it will happen, but Trump has
proven in office that he has a tendency of getting his way in the end, and I
would personally not want to be on the wrong side of the trade when the
President of the United States is demanding for lower Oil valuations.
What does this
all mean for the Nigerian economy?
Although
Nigeria remains on a quest to diversify away from Oil reliance, a handsome
chunk of the nation’s export earnings is from Oil sales. While rising Oil
prices will boost government revenues, provide foreign exchange stability and
support economic growth, it leaves the country vulnerable to external shocks.
With robust production from US Shale stimulating oversupply concerns and fears
around slowing global growth potentially impacting demand, Oil’s upside seems
limited. If Oil prices end up depreciating back below $60 in Q2, this will not
only impact growth prospects but also Nigeria’s efforts to support its 2019
budget. The ramifications of such a development will most likely complicate the
Central Bank of Nigeria’s efforts to cut rates further in an effort to boost
economic growth. However, further signs of Nigeria breaking away from Oil
reliance to other sustainable sources of growth such as agriculture have the
potential to limit shocks created from Oil volatility.
WTI knocking on
the door at $60, but is anyone home?
Focusing
on the technical picture, WTI Crude has reached tough resistance on the monthly
charts with $60 acting as a barrier for bulls preventing prices by being pushed
higher. The $60 level ironically also reflects the 50% Fibonacci retracement
level of the October - December 2018 downtrend, which helps explain why we are
noticing a trend of selling pressure jumping back in the market close to $60.
Until
Oil is able to secure a decisive monthly close above $60, it looks like a
ceiling is in place for Oil bulls and selling rallies below this level is going
to remain as a tempting strategy for bearish investors. A weekly close below
$56 will act as a signal for further downside with $52, $50 and $47.80 acting
as key points of interest.
If
prices are able to conquer $60, Oil has scope to challenge $65.
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