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Trump is wrong when it comes to oil and OPEC



U.S. President Donald Trump pushed Twitter last week to hold OPEC responsible for making oil prices "artificially very high". The reality is that the price of a barrel of oil at the $ 70 level is less over OPEC and more over demand

There is a rule about goods that people forget, namely that they are bought and not sold. The next crude oil prices are unlikely to be forged by the OPEC countries, but are likely to depend on the strength of US consumers and the health of the global economy. The recent rise in oil prices follows a trend pattern of rising prices since the beginning of 2016, driven by global growth momentum. The production recession in China depressed crude oil from late 2014 to early 201

6. There followed a global economic expansion, accompanied by a rise in oil demand and oil prices.

The oil market had two supply narratives against the more critical leitmotif of demand rising. The bullish narrative has focused on the OPEC / non-OPEC agreement to reduce oil production in a manner that lowers the five-year average of global stocks that skyrocketed during the recession in China. The bearish narrative focused on US slate supplies that can be easily marketed, although the production of shale oil wells can decline rapidly.

Although oil price hikes have been more modest than other commodity prices, this is mainly due to the high level of inventory. What is important now is that the recent trend was higher. Now, the US summer driving season is facing additional demand, while global growth prospects – at least in the International Monetary Fund – are strong despite the trade risks.

Despite Higher Prices US demand for gasoline is likely to be strong given the low unemployment rate of 4.1 percent and rising wages. Although there is a debate about whether higher oil prices are inflationary or deflationary when driven by demand in a growing economy, they are primarily inflationary rather than deflationary. Oil prices are still relatively low compared to the high levels seen only in 2014, when oil prices exceeded $ 100 per barrel.

Yet, it is not difficult to see how demand could support oil and gasoline prices and cause higher inflation in the US, further putting pressure on the US Federal Reserve to raise interest rates. The same inflationary pressure is also threatening corporate profits through higher borrowing costs caused by Fed rate hikes. The disadvantage of higher oil prices comes later in the credit cycle when growth is more vulnerable to trade or higher interest rates. After all, the recent fall in oil prices in February correlated with sell-offs in equities, bonds and industrial metals, which was driven by higher interest rates.

In the great momentum of the oil markets, OPEC cuts have been an effective counterweight to rising shale production, with global oil inventories falling to the five-year average. But the health of the world economy will drive the trend of oil.

Contact the author of this story:
Jason Schenker at jasaschenker@prestigeeconomics.com

Contact the responsible editor for this story:
Robert Burgess [19659012] at burgess @ bloomberg.net


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