Oil: Don’t Get Carried Away By Rumours

Oil: Don’t Get Carried Away By Rumours, We Need Deep Production Cut

Oil prices have spiked once again on the back of the news that two major parties have agreed that the current oil cut needs to remain in place beyond this year. On one hand, this is good news because we are looking at a situation where we would not have to worry oil production and its baggage for some time. There is no doubt that it would also impact the supply glut because the only reason OPEC and non-OPEC have adopted this strategy is to reduce the supply glut which has been building over the years. Although it will take some time to have an impact on this supply glut.

On the negative side, we are still concerned about this news. We think that traders are reading too much into this situation and they are being too optimistic. The current production cut has not been able to produce any substantial results so far. Moreover, the threat of compliance by the members who are agreeing to this production cut still remains a viable risk for oil prices. Furthermore, countries like Iran are still ramping up their production and more importantly, US shale oil producers are taking the biggest advantage of the current situation by adding more oil to the global supply glut.

Therefore, to be completely optimistic about the future of oil prices rising above the 60 dollar level, we need two things: a bigger cut by OPEC and a strong demand shock. Both of these present a scenario under which the future of oil prices does look to be full of life.

China Playing A Lead Role To Promote Global Trade
Over in Asia, China has shown once again that is ready to play a leading role and become a global leader while some countries are adopting the route of becoming a closed economy and favoured populism. The country has pledged more than $100 billion to finance projects under its One Belt, One Road strategy which will aim to promote trade links with other countries. A forward-looking move which could strengthen its position in the coming years.

Sentiment Positive Despite Heightened Tensions Around North Korea
Overall sentiment in the markets remains somewhat positive despite the poor industrial production economic data released in China. The finance ministers of the G7 countries met over the weekend and they have shown their anxiety towards the populism and increasing geopolitical tensions sweeping the world. They highlighted that the protectionism strategy being adopted in the US could harm global growth. While North Korea has further escalated tensions by testing another nuclear missile over the weekend.

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