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‘No Trade Deal’ Scenario Keeps A Hard Cap On Oil Prices

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Via Oilprice.com

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Recent financial market headlines have been dominated by stories covering the plunge in global interest rates. And for good reason. Government bond yields have been sinking like a stone lead by a move in the US 10yr yield down to 2.1% for an 18-month low. Meanwhile, in overnight markets, the 3-month LIBOR has dropped from 2.8% in December to 2.5% this week. So why are investors flocking to bonds? Simple- heated rhetoric between Washington and Beijing is making a US/China trade pact seem less and less likely every day and raising concerns that elevated tariffs could trigger a global recession.

Concern that the two sides are only moving farther from a deal is justified. Rhetoric from the Trump administration is taking a hard line, no compromise attitude towards the negotiations which could be difficult to reverse. In Beijing, President Xi is now using the tougher US stance to generate nationalist support arguing the US is maligning the Chinese and threatening their sovereignty. The Chinese newspaper People’s Daily has taken an extremely aggressive path in generating support of a non-cooperative trade attitude writing “we advise the US side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!” Chinese officials have also threatened to cut off exports of rare earth materials used by the US to make electronics, defense materials and electric vehicles. The issue here, of course, is that both sides seem to have left the negotiating table in a manner that will make it hard to return by making overtures to their supporters at home rather than to each other. While a 2019 trade pact is certainly still possible, financial markets are putting lower and lower probabilities on a deal being struck.

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So why should oil traders care about the increasingly bearish macro picture? After all, we’ve had low-interest rates correspond with a wide range of oil prices in the past. In fact, we can’t find any sort of statistically meaningful relationship between interest rates and oil prices over the last ten years. Low-interest rates don’t have to mean low or high oil prices. However, we can say with a high degree of confidence in current circumstances that US/China tensions will persist as a bearish input in a market where demand growth is already seriously lacking and global crude inventories are rising. Remember that current oil supply/demand…




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