Markets Insight From IG: October 2018

18 Oct 2018 | 09.13 am

Markets Insight From IG: October 2018

Hurricanes, trade wars and boycotts can all affect oil's price rise

18 Oct 2018 | 09.13 am

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Oil prices have been rising strongly but the $100 target is still by no means a certainty, writes Martin Essex, analyst and editor of IG’s free news and research site, DailyFX.com

When a price has been rising strongly and the media begin warning of a huge further increase, it is probably a good time to sell. Take oil, for example.

The price of Brent crude, the global benchmark, advanced from just over $70 per barrel in mid-August to more than $86 in early October – a hefty 23% increase in less than two months that led almost inevitably to predictions that the price would reach $100 sometime soon.

The price may have reached $100 by the time you read this, and there are plenty of good reasons why it should. US sanctions targeting Iran’s crude oil exports are due to come into force on November 4, and Washington is pressing companies and governments worldwide to comply by refusing to buy Iranian output.

Moreover, the economy of another major oil producer, Venezuela, is in meltdown and its oil exports are falling. While China may help it out, there is clearly a risk of higher prices as Iranian and Venezuelan crude are boycotted – reducing market supply.

The China Factor

It is also assumed that both Saudi Arabia and Russia have limited scope to fill the gap, as called for by US president Donald Trump. However, one report suggested these countries struck a deal in September to pump more but kept it quiet to avoid being seen to bow to American pressure.

Speaking to a friend of mine recently who knows more about the oil market than anyone else I have ever talked to, he believes that the idea of $100 oil is fanciful. Don’t forget, he says, that the US and China are in the middle of a bitter trade war.

Some have argued that this is a dispute China cannot win, as the US goods deficit with China is an enormous $375bn, meaning that China has far more to lose. However, China has some weapons in its armoury.

In oil and gas, China bought $7bn more oil and gas from the US than it sold to it last year. If China were to stop buying crude from the US and buy it instead from Iran and Venezuela, it would benefit Beijing in several different ways.

For one, it would no doubt irritate Donald Trump. It would also increase Chinese influence in both countries and damage the US oil industry, which China’s government might enjoy, too.

Certainty? Certainly Not

This is a possible scenario rather than a prediction. We are still at the peak of the hurricane season and tempests might knock out sufficient US offshore production to push prices higher.

On the other hand, US inventories of crude oil have been rising, offsetting potential supply disruption. Still, the key point is that $100 oil is by no means a certainty, which also means that oil exploration company shares are not necessarily a buy.

Note, too, that the US dollar has been remarkably strong of late. If it continues to advance, that will lower the oil price that is quoted globally in dollars.

However, for buyers in euros, pounds or yen that will be of little comfort, as black gold will still cost more in those currencies.

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