We shall dive deep into the latest reports from the CFTC and ICE on how traders are committed to oil on Wednesday. For now, it is imperative to point out the obvious. The Israel-Iran acrimony has spurred financial investors to migrate back to the European crude oil benchmark. Brent net speculative length quadrupled for the week ending October 8 from a historically low level of 41 million bbls to 165 million bbls. Long positions have been built up in anticipation of an Israeli offensive on Iranian oil infrastructure. Will it happen? The ubiquitous view is that an Israeli retaliation is almost inevitable but whether the target will be the nuclear or energy infrastructure or perhaps the Iranian military is equivocal.

Yet, the growing tension was sufficient to make the market pragmatic and oil finished the week higher. An assault on oil installations or the halting of traffic through the Strait of Hormuz could, indeed, send oil significantly higher but the underlying oil balance, if left on its own device, will not support oil. That much was clear after the updated monthly EIA report. Libya’s return to the export market will not brighten the outlook either. Last week’s US inflation data cooled expectation of another 0.5% rate cut in November – no extra boost for oil demand. China’s monetary stimulus measures failed to stimulate and the weekend’s pledge from the finance ministry to borrow more was long on cliches and phrases but short on reassuring and convincing details. Deflationary pressure on producer prices remained entrenched in September amidst lax consumer demand. The rhetorical question is which direction the next $20/bbl move will be. Luckily, this type of question does not have to be answered therefore the best advice is to watch out for headlines; they will keep driving sentiment and prices.

The US is the Bulwark of Growth

The world’s biggest economy is doing what it always wants to do: blazing the trail hoping that others are able to follow, something that is anything but pronounced. Given its relatively stable legal environment, its innovation-minded economy, its developed technological sector and its comparatively vast population and internal market it has been the most significant economic force for decades. This includes the post-Great Recession period and the last 4 years when the global economy started to climb out of the deep hole dug by the devastating health crisis, which originated in China.

The numbers speak for themselves. The S&P 500 index has returned 590% to investors since 2010. It compares with 150% by MSCI Europe and 120% by the FTSE-100 index, JPMorgan observes. As the recovery from the pandemic-related slump continues the country’s GDP will grow 2.72% in 2024, according to the IMF, higher than in 2019. The eurozone economy will only expand by 0.42%, down from 1.59% 5 years ago, whilst Chinese growth prospects are equally gloomy – 5.95% in 2019 versus 4.64% in 2024. These gaps are a testament of how the US handled the health crisis compared to others.

Deviating economic fortunes are inevitably mirrored in oil consumption estimates. The updated EIA report on global and regional demand and supply confirms the abovementioned trend. According to its latest findings, the world will need 2.34% more oil by the end of 2024 than at the beginning of 2023. OECD nations will demand only 2.05% more and the US, a member of the rich nations’ club, will see its oil demand rise by 3.58% during this period. The annual demand increase averages 3.10% in the US between January 2020 and December 2024, comfortably higher than that of the OECD countries, which stands at 2.30%. Stock market trends are unmistakably reflected in the direction oil demand growth takes. 

Once these relationships are established the two questions that need to be answered are whether the prominent role the US plays in supporting the global economy and oil demand can be maintained and what must happen for the incumbent tendency to reverse. Of course, the US can remain the harbinger of economic and oil demand growth, particularly these years, when the impact of globalization and interconnected economies is paling in relevance and inward-looking economic models are becoming more prevalent. On the other hand, the outcome of the US elections in less than a month can alter the current perception and investors’ thinking.

To say the result hangs in the balance is an understatement. Given the peculiarity of the US election process, the next habitant of the White House will plausibly be decided by a handful of votes in a handful of swing states. Should the pendulum swing in favour of Donald Trump, the current advantage the US claims over the rest of the world will most likely disappear gradually.

The Committee for Responsible Budget, a Washington-based non-partisan group estimates that federal debt would increase by $7.5 trillion through 2035 in case the former President crosses the finish line first. His economic agenda, lowering income and business taxes, protecting domestic manufacturers by implementing import tariffs, effectively a tax on consumers, and deporting immigrants, could lead to a fiscal crisis as it is anything but unequivocal how these measures would be funded. Just remember the havoc the unfunded mini budget wreaked in the UK in September 2022, during the brief premiership of Liz Truss. Kamala Harris’s economic agenda envisages a rise in debt of less than half of Trump’s.

Fiscal challenges, such as record debt levels, structural deficits, and elevated interest payments, will prove challenging for either candidate, but more so for the Elephant than for the Donkey.

History suggests that in the case of a Republican presidency equities usually ride the wave of the election result for three months. A Democratic win will set the wheels of euphoria in motion later with the peak around 12 months after the votes are counted. If Donald Trump wins, the gap between US and global stocks will narrow when the enthusiasm subsides and economic reality sets in – especially in case of a Republican majority in both chambers of the Congress. The move will be amplified by the long overdue rebalancing in stock portfolios since the comparatively stellar performance of US equities over its peers in the last 15 years has made investors perilously overweight in US shares. And if the sentiment on the US economy and stock markets turns sour, there is only one way for the revision on oil demand estimates to go, pulling a salient layer of support from under our market.
 

Overnight Pricing