US-China trade deal supports sentiment in the oil market
The sentiment in the oil market has changed since our last issue a week ago, and Brent oil prices are up roughly 10% or USD 6 since Monday, May 5th. We are currently trading just below USD 66.
Notably, the oil price continued to climb yesterday following the news from the China–US trade meeting in Switzerland.
Both equity and commodity markets responded strongly to the trade headlines. Trump has backed down, and the fears that the US would hike tariffs across the board and isolate itself, to some extent, have largely disappeared.
That said, tariffs on Chinese goods remain high at 30%, and Chinese tariffs on US goods are at 10%. Additionally, curbs on Chinese exports, including those on rare earth metals, also remain in place. Furthermore, the tariffs have been lowered for only 90 days to make room for further negotiations.
However, the risk of empty shelves in the US and a potential recession in the American economy has now diminished. That said, inflation in the US is still expected to rise over the coming months.
With the risk of recession reduced and inflation still too high, the market – unsurprisingly – has lost faith in imminent rate cuts. The market is now pricing in just two rate cuts this year. This shift has also strengthened the US dollar, with EUR/USD trading at 1.11 after reaching a high of 1.15 in April.
Price developments since early April confirm our previous view of strong support for Brent prices in the USD 60–64 range.
Nevertheless, several challenges remain for the oil market. With Trump in the Middle East today, he may attempt to exert additional pressure, particularly on Saudi Arabia, to raise oil production. We believe OPEC+ is likely to announce a new and significant production increase in early June, but we also expect it to be the last such increase for now.
But significantly, the risk of a significant drop in oil prices has decreased. This also means that, even though prices are slightly higher this week, it makes sense to increase hedging (fixed-price agreements) at current levels, especially if Brent returns closer to USD 64. For those exposed to the US dollar, there is also a clear risk that the dollar could regain more of its earlier losses.
We reiterate that we see strong support for Brent in the USD 60–64 range. However, with the recovery in financial markets, we may, on the one hand, slowly return to the USD 70 level over the coming three to four months. On the other hand, the OPEC+ announcement and the likely slowing of the global economy, despite the trade agreement, suggest lower oil prices.
Importantly, energy was never a part of the US and Chinese trade tariffs. Hence, there will be no direct impact on the energy flows. However, a significant indirect effect on overall growth and oil demand is expected. For the shipping market, the effect will be felt through the impact on trade volume. Bunker demand can also be impacted.
In today's issue, we also take a closer look at the other geopolitical factors impacting the oil market.
