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The oil price creates pressure again

The output from several large oil-producing countries have either dropped or are at risk to decrease, which of course cause some pressure in the oil market.

Last year the oil price fell significantly during the fourth quarter, from approximately $85 to around $50 per barrel (159 litre) as graphic one shows. The US Fed governor Jerome Powell was very quick to cancel further interest rate increases due to lower inflation. The lower oil price was surely not the only reason for the change in the central bank’s position, but the dropping oil price came very convenient.

It has for example also led India to lower the interest rates, which was way too early, but the central bank was just waiting for any motivation to take that step, and now the oil price is rising again.

A number of airlines live just as marginally, and as graphic two shows, it is natural that the price of kerosene follows the oil price. The big Indian Jet Airways has crashed financially saying that the revenues are too low. This is basically why many companies run out of steam though this, however, coincided with the recent increase in oil prices. The Icelandic WOW has also stopped, where the story is more complex than just the oil price, but again it coincides. However, considering both graphics it is striking that the current oil price and the kerosene price just is at the same level as where it traded most of 2018.

The examples show how the oil price begins to squeeze here and here. It is around the world and at different levels, though my attention is now focused on whether the oil price is so high that the development gives reason for a major adjustment of expectations for different sectors and countries.

The oil price has not increased too much yet, but I think it will be critical if the Brent price trades above the highest level from last year, i.e. above $80 to 85 dollars per barrel. But as the oil price has been trending straight upwards since the beginning of the year it is natural to consider whether the development simply continues?

I allow myself to link the consideration to the examples I have mentioned. The fact that the oil price rises to $85 should actually not mean much more than some companies realises a decline in profits, while others earn more. However, my impression is that the margins in the global economy are still diminishing, so the economic and financial reactions to the surging oil price are worth following.

Just a few years back, I would consider an oil price of above $100 as a global economic pain level. It may still be the case, but it requires the oil price to increase more, to get a feeling for where the economic pain threshold currently is. I judge some reactions as an indication of a lower pain threshold than the prior $100 per barrel.

It is not my main scenario that the global economy will be hit by a growth slow-down related to a sudden further jump in the oil price. But the fact is that the oil price has increased significantly and therefore has come closer to a level which requires increased attention.

Overall, it is my opinion that the global supply of energy is more than sufficient to cover the demand, also in the future. However, there may well be temporary pressure on the oil price for a number of reasons, though it is certainly not the global growth which pushes up the price on “Texas Tea” or oil from other areas.

Politics and the oil price have always been connected, and currently it is getting more outspoken again. The latest price increase is a reaction on the possible tougher American sanctions aimed towards oil import from Iran. It can generate a current supply challenge as the oil has to be bought from other oil producing countries. Under normal circumstances it would work, currently however Venezuela is a challenge as the oil production has dropped significantly. Libya is on the brink of a civil war so all in all there is simply a growing risk of a temporary shortage in production.

Again, it is historically well-known that precisely such developments provide a spike in oil prices, but fortunately the world is not just as it used to be – it would be too boring.

Due to the huge increase in oil production from oil sand in the US, the country has now become the world’s largest oil producer with 15 pct. of the global oil production.

The upheaval is particularly because the US has gone from being the world’s largest oil importer to now, having such large production that the country in reality can export oil (huge volumes are im- and exported to and from US, due to commercial reasons and because different oil qualities are needed).

But the net oil, or energy, position creates a new political dimension because the US is basically not dependent on oil imports as it was earlier. Prior The White House had to follow a political strategy that didn’t clash with the OPEC countries. Now, the US president is one of the more belligerent ones, and at the same time the United States is not dependent on oil from the OPEC countries to the same large extend anymore.

Therefore, it is also somewhat less risky for American politicians to confront for example the OPEC countries, which again embeds a bigger risk for sudden fluctuations in the oil price.

However, there are a few technical factors that also are worth taking into consideration, which have an impact on the oil price. If one just regards a barrel of oil as a barrel of oil, then the US actually can compensate for a part of the daily oil production in case of an international sanction against an oil producing country.

A technical challenge is however, that the oil which primarily is demanded in the world is the “heavy crude” and not the “light” which is produced in the US. The heavy quality is produced in for example Venezuela and Saudi Arabia which brings the most classic oil producer of them all, Saudi Arabia, back in the game.

Right now, the oil market certainly would welcome a higher output from Saudi Arabia. But one should not forget that the large oil producer’s fiscal budget requires an oil price of $80 to balance.

It is probably where the oil price is heading, which does not rise any major concern in my view on the global economy. As mentioned, it is currently not my main scenario that the oil price will trade much higher, though if it happens, I might adjust towards a more negative view of global growth.

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