OPEC and the Price of Oil

President Donald Trump has been agitated over OPEC and the price of oil and tweeted: “We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now!”

OPEC did not seem to pay too much attention and the oil price has risen again.

Economically speaking, this is not a huge issue. It simply represents the transfer of wealth from oil buyers to oil sellers, and OPEC countries have today a far higher propensity to consume than they used to have, so the money finds its way back into the global economy.

A higher oil price may give some demand for the dollar on the foreign-exchange markets as oil buyers will need more dollars in order to buy more oil.

It may also affect "inflation perceptions," primarily in the United States where the retail price of oil is more likely taxed. As a high frequency purchase, oil plays a disproportionate large role in shaping consumers’ perceptions of inflation.

Anyway, major oil trading houses are now predicting the return of $100 crude for the first time since 2014 as OPEC and its allies struggle to compensate for U.S. sanctions on Iran’s exports.

It’s a fact that the market does not have the supply response for a potential disappearance of 2 million barrels Iranian oil a day in the fourth quarter and besides that, U.S. shale has still its growing pains, which all makes it conceivable we could see, that doesn’t mean we ’will’ see, $90 oil by Christmas and $100 in early 2019.

Anyway, as an investor I would keep that in mind.

China Trade War Intensifies

The latest round of U.S. duties took effect on a list of products ranging from frozen meat to television components.

Only an hour after the U.S. imposed new tariffs/duties on $200 billion in Chinese goods, China has canceled talks that were scheduled for this week.

More significant is the question of whether today is "immediate" or not.

President Trump threw caution to the wind and threatened to "immediately" tax everything with so much as a hint of China about it, in the event that the Chinese reacted to the latest round of tariffs, which in fact they did.

So, Americans are waking up to find another lot of tariffs that are thrust upon them. From today, $200 billion of goods ‘partially made in China’ will be subject to a tariff of 10 percent with the prospect of yet higher rates as of January 1.

Something like $4.5 billion of European exports to China may well be also caught up with this tariff process. Made in China does not mean of course 100 percent made in China.

Chinese consumers are also subject to taxation through their governments’ retaliation, although subsidies and other offsets are planned to be used to mitigate that particular problem.

If President Trump’s threat is credible, then today would have to be considered "immediate."

Brexit and Sterling (GBP)

The interminably tedious process of the UK and the EU separating (Brexit) saw stirring a dramatic event this weekend, which has left the process as interminable and as tedious as it was before.

Prime Minister Theresa May gave a defiant speech on Friday aimed at bolstering support ahead of the conservative party conference.

That was to be expected. Les expected perhaps was a suggestion support for a ‘hard’ exit from UK members of Parliament who had previously backed ‘remaining’.

The strength of the language of the Salzburg, Austria summit has ‘perhaps’ increased the risk of a harder exit.

The opposition labor party leader Jeremy Corbin has said that the views of the ongoing labor party conference will be honored, which in theory could raise the chance of a referendum, not on exit, but on the terms of exit, but this remains a very low probability.

U.S. Commodity Futures Trading Commission or CFTC data show that speculative positions ‘against’ Sterling (British pound) are growing, but other indicators of risk sentiment, most notably EUR/GBP risk reversals, suggest that stress levels remain quite some way off the extremes that were reached in the summer of 2016 even after last Friday’s moves.

For now, sterling (GBP) remains at about the levels of $1.31 per British pound of Friday’s close.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.