Saxo Bank: Geopolitical risk in the driver’s seat for oil prices

Saxo Bank: Geopolitical risk in the driver's seat for oil prices

April 18 (UPI) — While trade tensions between the United States and China could throttle momentum, geopolitical risk is supporting crude oil prices, Saxo Bank said Wednesday.

Crude oil prices started 2018 in rally mode on emerging geopolitical risk and steady support from members of the Organization of Petroleum Exporting Countries for an effort to balance an oversupplied market with coordinated production cuts. In January, Saudi Oil Minister Khalid al-Falih suggested there may be a long-term duration for the effort, now in its second year.

Tighter markets, a weaker dollar, some level of geopolitical risk and an improved economic outlook supported higher crude oil prices for most of January. Last week, the risk of a multilateral conflict spiral over Syria helped push crude oil prices up more than 5 percent in as many days. Brent, the global benchmark, has held above $70 per barrel in recent sessions.

Ole Hansen, the head of commodity strategy at Danish investment firm Saxo Bank, said crude oil prices are under pressure from simmering trade tensions between the United States and China. Both sides have proposed tit-for-tat trade restrictions, which could create headwinds for global economic growth.

On Tuesday, the International Monetary Fund said it was optimistic in general about the pace of global economic growth, though that growth could be derailed prematurely by trade tensions.

“That major economies are flirting with a trade war at a time of widespread economic expansion may seem paradoxical, especially when the expansion is so reliant on investment and trade,” IMF research director Maurice Obstfeld said in a statement.

That would be drag on crude oil prices, though Hansen at Saxo Bank said there was a risk premium built into the commodities markets.

“We are facing multiple sources of geopolitical risk including Russia and the West on opposing sides in Syria, as well as Iran against Saudi Arabia and the United States,” he said in commentary emailed to UPI. “While increasing the level of uncertainty, these simmering tensions have also been providing some underlying support for crude oil and, to a certain extent, gold.”

Elsewhere, John Hardy, the head of foreign exchange strategy at the Danish investment bank said the U.S. dollar could be weakened by economic policies of U.S. President Donald Trump. This administration, Hardy said, has shown little fiscal discipline so far and that could spell the end to U.S. recovery.

“As we look to the rest of 2018 and beyond, we suspect we are nearing the beginning of the endgame for the U.S. dollar’s role in the global economy,” he said.

U.S. Treasury Secretary Steven Mnuchin came under criticism for his apparent support for a weaker dollar at the World Economic Forum in Davos, Switzerland. The strength of the dollar has an inverse relationship to the price of oil. The weaker the dollar is, the more expensive the oil.

The IMF said, meanwhile, that wage growth has been sub-par and “many households have seen little or no benefit from growth.”