Opinion



March 20, 2019,   4:50 PM

Oil Hits New High In 2019 Following Summit In Baku, But Are These Gains Sustainable?

Jameel Ahmad

Jameel Ahmad is the Global Head of Currency Strategy and Market Research at FXTM. He specialises in financial market developments, with a particular emphasis on global currencies, commodities and emerging markets. FULL BIO

opec

The OPEC headquarters in Vienna. Image source: Flickr

Oil prices have enjoyed an unexpectedly bright start to the first quarter of 2019 so far, with a jump beyond 20% for the commodity, leading to the valuation of US Oil reaching a new high for 2019, marginally above $59 just hours following the Joint Ministerial Monitoring Committee (JMMC) meeting in Baku this week.

Investors are already used to the regular flow of OPEC economic announcements and summits throughout the calendar year, but this one in Baku also gained international attention because it includes a committee of OPEC+ producers who agreed to collaborate with traditional OPEC members to ease production output pressures.

What everyone wants to know at this point is whether now is the appropriate time to buy oil on optimism that the commodity could finally rebound to levels above $100 that have not been seen since the second half of 2014. Investors could be wise to remain cautious against the risk that the pace of gains is not sustainable at these levels, and even that prices are at threat to being capped around the $60 handle.

One of the most interesting headlines coming out of the get-together in Baku is that there is contrast in the narrative being offered by two of the largest producers in the world—Saudi Arabia and Russia. The comment made by Saudi signaling that production cuts from oil producers are “nowhere near complete” suggests that the Kingdom still wants to achieve higher oil prices. This has been compounded by comments made by Russia that current valuations are “acceptable to all parties.” This view by Russia will ring in the ears of investors for some time, because it echoes a similar narrative provided by Russian President, Vladimir Putin at the end of 2018. This contrast in narrative also articulates the number of conflicting interests around the oil prices as there are incentives from a number of different producers for the price of oil to reach a certain level in order to gain margins and meet fiscal targets.

Producers like Saudi Arabia, Nigeria and Venezuela stand in the group of nations that still require higher prices of oil to meet their own fiscal targets, which remain highly important figures to government revenues and, in turn, GDP momentum for governmental spending. Whereas Russia is the example of the other side of the table, which can meet its own fiscal targets with a price of oil above $40. 

Oil prices are more likely to remain range-bound, rather than record further significant milestone highs from recent levels due to a number of unknown factors that are still pending elsewhere. For example, record production out of the US is going to remain encouraged by the advance seen in oil so far in 2019; while the possibility of sanctions on Venezuela and what happens to the waivers currently in place for nations exporting from Iran as they approach their expiry dates in the coming weeks are other factors that hold the cards to providing a shock to oil market volatility.

It’s a very tough call to provide a direction on which way the commodity will move next, due to the unknown political risk factors that can spark volatility in the oil markets within an instance. There is, however, one elephant in the room that oil investors must remember and not discount from valuations—the negative narrative on higher oil prices that is presented throughout President Trump’s social media feeds.

President Trump has made it clear on numerous occasions that his desire is for oil prices to return to lower levels for a prolonged period. Don’t be surprised if he comments once again on this desire within the coming days. While Trump might not be President of a nation that is a member of OPEC nor OPEC+, he is still an influence to world financial markets. President Trump’s influence is a scenario that investors can never prepare for when it could occur, and represents something that could see oil markets reversing from important psychological levels, while also representing the unforeseen threat of oil quickly reversing its year-to-date advance.  

Economic momentum in the US does stand at risk to the same external headwinds that are impacting a number of different developed and emerging markets across the globe, and President Trump sees lower oil prices as somewhat of a stimulus measure for consumers (lower fuel prices hypothetically equal more disposable income for US consumers), at a time where the previous tax cuts and other fiscal reforms that his administration has implemented is starting to show limited impact. 

Overall there is a contrasting dynamic of a number of different factors that can manipulate the price of oil at a moment’s notice but President Trump has shown that he has the tendency of getting his way in the end, and this is something that will weigh on the mindset of potential oil buyers.



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