Oil markets brace for more volatility
dubai — Spot crude oil benchmarks had an explosive start in October, with Brent crude accelerating past $86 and West Texas Intermediate doing its best to catch up but lagging by around $10.
Their race to the $100 mark was interrupted by the news that the US is considering waivers on Iran oil sanctions and that India has bought Iranian oil for delivery in November, when sanctions are due to take effect. Equity benchmarks in China and India witnessed sudden weaknesses on the back of the sharp rises in crude oil prices in an ominous reminder of the World Bank’s theory that there’s a global financial crisis every 10 years, and the next one may be just around the corner.
Trade policy changes in the US and geopolitical tensions are part of the themes that are inflating crude oil prices. Their impact is likely to prevail, and the oil markets are braced for more volatility, much of it stemming from emerging economies. On the bearish side, higher crude prices may significantly impact oil demand growth in developing economies, especially those whose currencies have recently suffered painful losses against the US dollar. Rising global oil prices could contribute to a slowdown in China, the world’s second largest economy, due to higher costs and lower profitability in the manufacturing sector. Although India remains on a quest to expand its manufacturing sector, which is less than 20 per cent of overall GDP, the South Asian nation faces considerable headwinds given higher commodity prices and the fact that it is a net importer of oil. Distress signals from India’s Sensex came through loud and clear in the first week of October, with the rupee hitting an all-time low, and energy stocks tumbling by 10 per cent in one day during a fierce sell-off.
Looking ahead into the rest of the fourth quarter, it seems clear the US economy will continue to fire on all cylinders, supporting the dollar against emerging currencies and major rivals amid a strongly protectionist policy. If the fears over Iran oil sanctions become reality and 1.5 million barrels per day in Iranian production have to be replaced by Saudi Arabia, oil prices may continue to rise towards $100. The journey upwards is likely to be accelerated by uncertainty over how much spare capacity Opec members and non-Opec Russia could muster to plug the looming supply gap. In this case, financial turmoil in stock exchanges and the prospect of lower growth in the emerging markets becomes more likely. The weaker emerging currencies become, the more difficult it will be for companies to afford oil imports needed for industrial processes and fuel. Corporate banks in China are significantly exposed to debt and may face defaults if profits and repayment abilities start failing.
Opec appears to be maintaining its supply-cut policy even in the face of US sanctions on Iran. Indeed, the prospect of increased oil revenues and profits after four years of relative austerity must be appealing to its members. Barring a policy change over the next three months, supply pressures appear here to stay, at least for the short term. Given the circumstances, oil may continue trading in a range of $75-$85 with the potential for sharp spikes or plunges triggered by Opec and US government policies.