Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Emerging Market Meltdown Could Undermine Oil Price Rally

Commodities / Crude Oil May 31, 2018 - 06:44 PM GMT

By: OilPrice_Com

Commodities

Saudi Arabia and Russia just destroyed the oil price rally, potentially putting an end to all the speculation about what the group might do next. But higher production doesn’t necessarily mean higher oil prices are entirely out of the question, and in fact, the oil market is still faced with a ton of uncertainty.


Higher oil production from the OPEC/non-OPEC group would seem to close off the higher-price scenario. But a “complete collapse” of Venezuela’s oil production could still push oil prices up to $100 per barrel, Bob Parker, investment committee member at Quilvest Wealth Management, told CNBC.

That was echoed by other forecasts. If the losses from Venezuela are combined with disruptions in Iran – knocking off around 1.6 million barrels per day (mb/d) – then Brent could jump to $100 per barrel, according to Bank of America Merrill Lynch. With that said, there are three potential factors that could prevent triple-digit prices, and instead “cap” oil at about $80-$90: increased production from Russia, Saudi Arabia and the U.S. strategic petroleum reserve.

Still, that is just one part of the story, focused on supply-side disruptions. Another possibility is a demand scenario, one that has received a lot less attention in recent months. While oil traders focus on whether OPEC/Russia will offset outages in Venezuela and Iran, there are cracks forming in the economies of emerging markets, which could threaten to derail the oil market, and do more to drag down oil prices than production increases from the OPEC+ coalition.

The thesis centers on the notion that higher interest rates from the U.S. Federal Reserve and a stronger dollar will have ripple effects across emerging markets. A stronger dollar and higher interest rates make dollar-denominated debt a lot more painful to service in much of the world, dragging down economic activity and putting even more pressure on local currencies. Weakening currencies then make dollar debt even more painful, creating a viscous circle. Economist Paul Krugman says the current cracks in emerging markets are somewhat similar to the lead up to the 1998 financial crisis in Asia.

The evidence is growing by the day. Turkey’s currency, the lira, has lost 20 percent of its value over the past two months. Argentina is seeking a bailout from the IMF as a collapse of the peso has drained public coffers.

More broadly, investors are becoming a bit more nervous about parking money in emerging markets. According to the Wall Street Journal, capital inflows into equity funds around the world slowed to just $8 billion in April, the lowest total since December 2016. Capital is flowing out of emerging markets and instead is rushing into the U.S., where a stronger economy and higher interest rates are making the U.S. comparatively more attractive.

Good news for the U.S., maybe, but bad news for a lot of developing countries. As the U.S. economic story diverges from that of the rest of the world, the dollar has gained in value. The WSJ Dollar Index, which measures the greenback against a basket of 16 other currencies, has gained 5.6 percent since February. Again, a stronger dollar creates a feedback loop in which emerging markets have trouble paying dollar-denominated debt, and it also makes commodities, including oil, much more expensive since they are traded in dollars.

Ultimately, in a worst-case scenario, that could lead to a financial crisis or crises. Governments can’t meet debt payments, currencies collapse, and economic growth grinds to a halt. Debt becomes even more unpayable.

An emerging market downturn, if it occurs over the next year or so, would likely unfold at the same time as the OPEC/non-OPEC group begins to exit, or phase out, the production limits. That means we could have demand destruction happening at the same time as an increase in oil supply, which is obviously a recipe for lower prices. Bank of America Merrill Lynch says that Brent could drop below $60 per barrel by next year if this scenario plays out. “Should PMIs start to deteriorate over the coming months and encourage long oil speculators to liquidate their positions, or new short specs, oil prices could swiftly drop to $60/bbl,” the investment bank said in a note.

With all of that said, the investment bank also says that this isn’t the most likely scenario, but more of a tail risk event. That doesn’t mean it is impossible.

Link to original article: https://oilprice.com/Energy/Energy-General/Emerging-Market-Meltdown-Could-Undermine-Oil-Rally.html

By Nick Cunningham of Oilprice.com

© 2018 Copyright OilPrice.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

OilPrice.com Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules