Progress with the $1.9tr US fiscal package coupled with better-than-expected Chinese trade data has helped push equity markets higher so far this week.
However, of more interest to us was oil price reaction to the attacks on one of Saudi Arabia’s oil fields over the weekend.
Despite the attack, which followed last week’s surprise decision by OPEC to keep oil production limited, the oil price has actually fallen back slightly this week.
This is of particular interest to us because it appears that the oil price may have peaked at $70 a barrel – which is the same level it peaked at the last time there was an attack on another of Saudi Arabia’s oil facilities in 2019 and also the level it peaked at in 2020 following the assassination of the Iranian military officer, Qasem Soleimani.
Consequently, this suggests that $70 may well be the tipping-point at which oil consumers start to consider alternative energy and the level which encourages US shale oil producers to restart production. We have long argued that OPEC’s power has diminished over recent years and US shale producers are the new swing price producers (please see here and here) – and as such we are unlikely to see sustainably higher oil prices.
And this topping out of the oil price helps cement our inflation and interest rate outlook – as we have previously stated, while we expect headline inflation will rise sharply in the coming months thanks to the distorted oil price during the early stages of the coronavirus outbreak, it is simply a transient pressure and as such we don’t expect to see a sustained above target 2% inflation rate.
Investment Management Team