By Lukman Otunuga
The explosive appreciation in oil prices could not have come at a more
testing period for the global economy currently embroiled in trade wars,
geopolitical risks and fears over decelerating economic growth.
Oil bulls are clearly back in the picture after drone attacks on Saudi
Arabia’s oil fields over the weekend wiped out 5.7 million barrels of
the kingdom’s production, equivalent to more than 5% of the world’s
daily supply. Although Saudi Arabia’s spare capacity and US Strategic
Petroleum Reserves could plug some of the lost output, where oil trades
in the near term will be influenced by how long it takes for Saudi
production to fully recover. It is this concern over negative supply
shocks amid geopolitical tensions which should keep oil prices buoyed in
the short term. However, where the commodity trades in the longer term
will depend on many factors including global growth, geopolitics and
US-China trade developments.
The dynamics influencing oil prices are certainly swinging back to
supply-side factors and this is being reflected in oil’s bullish price
action following the monumental disruption.
Who are the biggest winners and losers from higher oil prices?
While higher oil prices are a welcome development for oil-producing
countries like the United States, Russia and Canada among many others,
it has the potential to increase the running costs of businesses
ultimately igniting inflationary pressures. Rising inflation will be a
drag on consumer spending, which may end up pressuring economic growth
Emerging market energy importers like Turkey, India and South Africa
will feel the heat from appreciating oil prices as it may not only stoke
inflationary pressures but complicate the central banks’ efforts to
ease monetary policy to boost growth. Rising oil also presents a risk to
China, the world’s second-largest economy, due to its strong appetite
for imported energy.
The biggest winner will be the United States due to its status as the
world’s largest oil producer, although everyone will lose if elevated
oil prices tip the global economy into recession.
Dollar firms on safe-haven flows
Heightened geopolitical tensions in the Middle East are encouraging
investors to maintain a safe distance from riskier assets.
In times of uncertainty and unease, the Dollar is still seen as a
destination of safety and this continues to be reflected in the Dollar
Index (DXY). Should risk aversion remain a major theme, the DXY will
push higher ahead of the Federal Reserve meeting this week. While the
path of least resistance for the DXY points north, where prices close
this week will be heavily influenced by the FOMC meeting and Chair
Powell’s press conference.
* Otunuga is Senior Research Analyst at global forex trading firm, FXTM
Frontpage September 16, 2019