Why Oil Prices Are Rising This Morning
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Why Oil Prices Are Rising This Morning

by | published October 9th, 2019

I have just ended the latest round of energy discussions among international contacts.

Given the nature of these conversations, the location, and who was present, there will be some developments of note moving forward. Next up is a trip to London in two weeks for a detailed treatment of energy transport security in the Persian Gulf and the South China Sea.

But as I digest what has transpired over the past two days, the more immediate has piqued my interest.

It is early morning and crude oil prices are moving up as I write this. Hardly a dramatic swing. Yet the movement does indicate the continuing effect of factors that have less to do with any read of underlying dynamics and more to do with geopolitics.

There are two reasons in particular that require your attention…

Perception is Reality

The first is the ongoing saga of U.S.-China trade relations. Here, a simple indication that Beijing may be agreeable to a partial resolution in the bilateral differences has been enough to move markets up in pre-market trade.

As is usually the case these days, Brent (the benchmark for futures contract pricing set in London) is rising a bit more than WTI (West Texas Intermediate, the standard used in New York). That is because Brent is more often used these days to set actual pricing for physical trades worldwide than is WTI and is, therefore, more sensitive to global developments.

American perspectives may view this trade tiff as a personal matter – that is, having a primary impact on what take place within U.S. borders- but the rest of the world sees it as having a far more pervasive impact on international economic prospects.

It is also a sign of the times that the improved tenor of markets and oil prices has resulted from a rumor. Nothing concrete, mind you, probably nothing more than a furtive floating of a trial balloon based on little more than a private opinion from a trade negotiator or the impatience of a pundit eager to make a short-term play.

The continuing uncertainty issuing from the tit-for-tat tariff war has brought global economic prospects into question. Each time one of the two largest worldwide economies issues (or even threatens) a new tariff most of the rest of the world takes stock.

This trade conflict will ultimately have a resolution. However, it is not likely to happen soon and will roll out in stages, prolonging the angst felt across borders.

Oil prices comprise a corollary concern. The connection between the need for energy and the condition of economies is direct, albeit often the subject of some rather tenuous reasoning. These days oil estimates seem to require an immediate projection of how more intangible external elements determine supply and demand considerations.

Most of this exercise remains anecdotal with estimations tempered once more substantive figures are obtained a quarter or two into the future. Overreaction first, reality later as the “analysts” continue with predicting five of the last two recessions.

This morning that process is providing some support to oil prices. But it is merely reactive; there are no tangible bases for the move.

The second factor is more serious. There is a virtual certainty that Turkey will attack northern Syria in an attempt to wipe out Kurdish rebels. Information is coming in that Russian and Syrian forces are moving north to cut off the routes of retreat. Additional Turkish pressure is also building on its border with Kurdistan (northern Iraq) to prevent reinforcements.

In the middle is an American ally in the war against ISIS facing extermination. The situation is a direct result of a decision to pull out US troops. That decision was probably inevitable given the reality on the ground. But coming so soon after a telephone conversation between Donald Trump and Turkish President Recep Tayyip Erdogan in which the US President announced withdrawal of troops doesn’t help the picture any.

Such unsettling events increase the perception of risk among oil traders who dislike one element more than any other.

Uncertainty, especially in this region of the world. That will push up oil prices, at least in the short run.

Pressure Building on the Home Front

Meanwhile, close to home, I continue to watch another aspect, one that is more domestic than geopolitical.

We are fast approaching, or may well already have achieved, effective full employment in the American economy. Putting aside the conversation about how many have left the workforce or are now considered structurally unemployable or are holding down more than one job, the figures say the picture is nonetheless strong.

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That usually translates into rising energy usage and higher oil prices. It is also likely to prompt discussion of whether wage-push inflation may be on the horizon. Effective full employment leads to increases in wages as competition increases for available labor, especially for skilled workers.

With WTI currently slightly above $53 a barrel, there is room for a further rise. But also keep this matter in view. If the price rises further, thereby obliging an increase in drilling, another labor situation hits.

There is a marked shortage of experienced oil workers. And that will usher in a pronounced round of cost inflation in the oil patch.

Sincerely,

Kent

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