Crude markets have come under immense pressure lately with pricing suppressed to $57.89/bbl for the international benchmark Brent as US crude futures West Texas Intermediate trading for $54.46/bbl as at Friday 09 August. Global aggregate demand is at risk with the US and China in a perpetual trade impasse that’s not going away any time soon. Donald Trump last week ratcheted tarrifs an additional 10% on $300bn worth of Chinese goods. The US has further accused China of being a currency manipulator after its Yuan slid 2.3% two days after the US pronounced that on 01 September tariffs would be implemented. China’s factory activity for the last 3 months has been in the doldrums printing below 50 at 49.4 (July) as reported by Markit/PMI. Reprieve came after stronger than forecast import and export data was released this week however this was erased by Trumps comments on the trade talks scheduled for September citing he doubts if anything will come out of it. This just thickens clouds of uncertainty around the globe. Central banks have geared themselves for rate cuts with the US Fed starting the cycle after it trimmed its FOMC rate 25bps (the first in a decade). India, Newzealand and Australia have eased policy in a similar fashion.
THE CRUDE MARKETS WILL REBALANCE
Oil markets have been characterized by geopolitical tension between Iran and the US with tanker attacks in the strait of Hormutz that has ratcheted tension but is pricing into the crude markets supporting ice Brent and WTI futures. The OPEC plus nations have also supported the markets by implementing the 1.2billion barrels per day supply cuts. One or two force majeures in Libya have affected supply fundamentals whose compensation has been through a rise in price. But with aggregate demand in China waning following the recent tariff escalation crude seems to have greater demand pull effects than the supply shorting fundamentals and as such today we have seen crude slide over 7% in the last two weeks to $57/bbl for Brent and $54.55/bbl for WTI futures. Infact the spread between the two oil types has narrowed significantly.
The markets are already pricing in a rebalance because any further plummet in price will trigger the OPEC plus states to increase their supply cuts more aggressively. While all this is happening, crude exporters are adversely hit because balancing fiscal budgets will be harder achieved for the Saudi Arabia’s, Nigeria, Angola, Gabon, Libya, South Sudan etc. Suppressed crude prices have potential to trigger currency devaluations and depreciations as have been seen in the Russian and Angola cases. These economies operate as though their currencies were pegged to ice Brent futures.
ODDS FOR FUEL PRICE CUTS FOR IMPORTERS
Ideally a lower crude price should trickle down the benefit to an importer but currency strength does play a bigger role in determination of this. Nations like South Africa whose energy regulation boards have adopted a monthly review cycle will sure significantly benefit from these crude bears. However for jurisdictions like Zambia whose energy regulation board conducts reviews very two months the oil bears may have already morphed into bulls considering the liquid nature and volatility of the markets. If bears persist the benefits to importers could be inflation easing, both at consumer price index and manufacturing input levels. A quick survey reveals that business condition deterioration points to high fuel prices as a result of not only costly crude but weak currencies against the green buck (the dollar). With the recent mood swings in the global economy the dollar has been far stronger for long and by default this means weaker emerging and frontier currencies affecting import parities. Most African PMIs are under strain (below or very close to 50) as challenging economic conditions persist. This is obtaining in South Africa (49.3) and Zambia (44.4) as at July.
Between now and September is a US Fed FOMC meeting, PMI readings from Europe, US and China that could impact crude prices. Asides these the markets remains with thickening uncertainty as to US China trade war whose talks are set for sometime in September. OPEC plus states could intervene by tightening supply further which the market is pricing in as seen from the marginal rise in crude pricing lately.
This article was authored by Mutisunge Zulu an Economics and Finance expert.
