Brent oil is now less than 2% away from its highest price back in October 2018 above $86/bbl.
Such is the upward momentum in commodity prices that oil was able to shrug off China’s lower-than-expected Q3 GDP and September industrial production data this morning. Despite signs of slowing growth momentum in the world’s second largest economy, that could point to slowing demand for the commodity, oil benchmarks climbed another one percent at the start of the Asian session on Monday.
From a fundamental perspective, global investors will be parsing the economic data releases this week for more signs about the tightening conditions in oil markets:
Monday, October 18
- USD: Fed speak – Kansas City Fed President Esther George and Minneapolis Fed President Neel Kashkari
- Apple to unveil redesigned MacBook Pro laptop
Tuesday, October 19
- AUD: RBA October minutes
- GBP: BOE Governor Andrew Bailey speech
- Google to launch Pixel 6 phones
- Netflix Q3 earnings
Wednesday, October 20
- CNH: China loan prime rate, September new home prices
- JPY: Japan September trade
- EUR: Eurozone September CPI (final print)
- GBP: UK September CPI
- US crude: EIA crude oil inventory report
- Tesla Q3 earnings
Thursday, October 21
Friday, October 22
- EUR: Eurozone October PMIs
- GBP: UK September retail sales, October Markit PMIs
- CAD: Canada August retail sales
- USD: US October PMIs
This surge in commodity prices has been due to rising demand as economies reopen from the pandemic, while supplies have been scarce. Global inventories of oil are below their 5-year averages, while last week, we learnt of the large drawdown in US stockpiles in the key hub of Cushing, Oklahoma.
This leaves major economies scrambling for oil to meet the rising demand, especially ahead of the winter months where consumers need heating fuel, with the likes of Europe and the UK now facing an energy crisis.
Fundamentally, oil benchmarks should have more reasons to climb higher, although one would suspect that most of its steepest gains are now in the past. Global market conditions are expected to tighten through the end of 2021, before tipping back into oversupply next year.
Hence, it would be of particular interest to see how Brent prices behave around the $86 region, assuming they get there.
Three years ago, that $86.29 summit was then followed by a drop of over 40% through the end of 2018 before rebounding through the first quarter of 2019.
To be clear, I do not expect a similar scenario of a sharp drop going into 2022. I do expect more gains before year-end, with prices then likely to moderate as oil markets become oversupplied once more in 2022. After all, OPEC+ has pledged to gradually restore its output over the coming months, which should help tilt the balance.
However, if stagflation fears rise, that could hasten the declines for oil prices.
Stagflation is an environment whereby surging consumer prices comes at a time when global growth is stagnant. Such conditions typically erode demand for the commodity. As basic economics dictate, when demand falls, so too do prices. Hence, a stagflation scenario is a crucial concern for markets and it warrants close attention.
With all that in mind, global investors will be keenly eyeing this week’s data out of major economies. The PMI readings out of the Eurozone, the UK, and the US would also speak to the health of these major economies.
If the global economic recovery is showing more signs of stagnating, that could imply that demand for oil in the near future may moderate relative to supply. Such an outlook could also weaken support for oil prices.
In short, watch how oil prices react to these major economic data, and of course, the weekly EIA inventories report for the US as well.
A strong breach of $86 should pave the way for $90 Brent, but Brent has to first overcome that psychologically-important resistance level at that 2018 summit.
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