Saturday, October 7, 2023, 01:17
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Joe Biden and Mohammed bin Salman at a meeting in Saudi Arabia PHOTO: Bloomberg
Until a week ago, a geopolitical alliance between Russia and an ally of America seemed to rule the world’s oil markets, pushing the price of crude up toward the psychological barrier of $100 a barrel. But United Statesthrough its economic means, intervened and the level dropped by $5 in a single day, changing the perception of oil importers around the globe.
Oil prices posted their biggest one-day drop in more than a year on Wednesday after data showed weaker-than-expected demand. It then extended Thursday’s slide on fears that slowing global growth will weaken consumption. Tellingly, it did so despite news that Saudi Arabia had raised the price of its flagship oil for customers in Asia for the fifth consecutive month, according to Bloomberg.
The recent surge in crude oil – which brought the benchmark from YOUR above $95 a barrel near the end of September – fueled speculation that the price would once again break above the $100 a barrel level, and the industry predicted it would head for $150.
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Meanwhile, West Texas Intermediate settled near $82 a barrel, breaking below its 50-day moving average for the first time since July. It fell 13.5% in just six trading days. That followed a drop in gasoline futures after data showed inventories rose in the US.
The reversal is sudden and appears significant. But perhaps we should be careful with the narratives to explain it. Has the economy really changed so much in the past six days to warrant such a drop?
Paul Hickey, co-founder of Bespoke Investment Group, is skeptical. “It’s funny to think that less than two weeks ago, rising prices were attributed to a stronger economy. Now that prices have started to fall, the narrative has quickly shifted to a slowing economy,” he wrote.
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Is the direction of the global economy really turning that quickly? If you use the day-to-day movements in a volatile commodity like crude oil as an indicator of the health of the global economy, you will be tone deaf.
Until now, the story had been dominated by geopolitics. The unholy alliance between Saudi Arabia and Russia to drive up prices was seen as a transformation.
This hasn’t gone away, but it’s interesting that this collapse has occurred despite announcements from Saudi Arabia and Russia that voluntary production cuts will remain in place until the end of 2023, and even though an OPEC+ committee has recommended no changes to the restrictions collective. The narrative that supply curbs will push up oil prices remains, but this week traders have shrugged it off.
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Meanwhile, Alan Ruskin from Deutsche Bank The AG drew attention to the US administration’s current attempts to negotiate a peace agreement between Saudi Arabia and Israelamid speculation that it would also involve a Saudi-American defensive alliance.
He said: “If this were to happen, the assumption is that Saudi Arabia would once again align itself more closely with the US and that increasing oil supply in the election year (and beyond) would certainly not be ignored in the discussion “.
The rise in oil prices was more than geopolitical, as a strategy orchestrated by Russia and Saudi Arabia. The start of the pullback in crude oil coincided with the bond market rally as investors digested the Federal Reserve’s stance for more time.
“When oil prices fall, it’s hard to find a level of support and there’s the potential for further downside,” said Fiona Cincotta, senior market analyst at City Index. “The narrative has changed and is now very focused on the point of falling demand,” she said.
2023-10-06 22:07:03
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