The recent momentum of the dollar’s setback has been caused by some improvements in the world statistics in the recent weeks. But the growth rate of the world economy is noticeably lower than a few months ago, according to PMI, and the actual introduction of tariffs between the US and China will surely become an additional weakening factor.
Oil managed to overcome gravity for some time, but this growth seems illogical amid the growth of supplies from OPEC +. According to many estimates, the increase in the production after the recent summit is very fast. In addition, after a few weeks of contraction, drilling activity in the U.S. has gone into growth again – this is another signal of production growth. On Friday, Baker Hughes said that the number of oil rigs grew from 5 to 863.
Thus, in the upcoming months, the world will face a slower global growth and an increased oil production. Last time this combination was observed in 2014 at about the same time: the growth in production, the slowdown of Asia, and the fears about the excessive stiffness of the monetary policy in the United States. Partly due to geopolitics, and partly simply because of the inordinate optimism of investors the oil managed to grow, but the situation was unfolded in late June 2014. Also, the oil unfolded as sharply as now in July 2008.
The oil rally may lose its momentum in the coming weeks if investors turn their focus from geopolitics to economic indicators.
If we look more strictly, of course, the oil not necessarily turns to fall in July. Corrections that began in April-May (2010, 2011, 2016) were not long and did not change cardinally the trend for growth.
However, if in the first half of the year the market frankly ignores economical negative for oil (like this time), in July-September the prices very often begin to collapse very rapidly.
By now, there is no reason to expect oil collapse as it was in 2008 or 2014. It is likely that the oil price will be under pressure because of the global supply growth with $40-$50 area, based on futures prices. Oil futures with long-range deliveries imply a scenario of adjusting quotes from current levels. It is quite possible that this scenario will begin to be implemented over the next several weeks.
What is more, that this development has one strong supporter: the U.S. President.
This article was written by FxPro