Brent and WTI both plunged the day the news broke and, despite a brief respite, have continued to decline ever since. Countries like the UK, US, Brazil, India, Japan, Australia, Thailand and Canada have imposed travel bans or are in the process of doing so on flights from from Africa. This sparked new lockdown fears.
However, there have also been important developments regarding the trade war between the United States and China. China criticized the United States for putting dozens of its companies on a blacklist, the infamous Entity List, and said this could hamper progress so far in terms of thawing economic relations between the two largest economies in the United States. world. At the same time, China has asked its ride-sharing service Didi to withdraw from the New York Stock Exchange over “data security concerns.” In addition, China failed to meet its target in terms of imports from the United States under the trade agreement. As the graph below shows, he was only able to meet 56% of his pledged amount. From January 2020 to October 2021, the total value of Chinese imports from the United States was $ 208.3 billion against the target of $ 334.8 billion. The following breakdown by Peterson Institute for International Economics is interesting.
After a recent virtual meeting between Biden and Xi, the idea of reducing tariffs remains questionable. Any further escalation due to the above and subsequent developments could trigger another period of economic instability between the United States and China, downplaying investor sentiment globally and affecting oil prices as in 2018.
Another factor that could play a huge role in negatively affecting the demand for oil, and by extension the price of oil, is the rise of the dollar. Due to the release of promising economic data, strong consumption figures and the prospect of rising interest rates as the Fed prepares to pursue a more hawkish policy, the dollar index has risen and now amounts to 96, its highest since June 2020. HSBC, JP Morgan and others have already made calls indicating that the dollar could rise further.
There is an inverse relationship between the dollar and commodities as they are valued in USD. As such, a rising dollar makes it difficult for other countries, such as emerging economies which are already under immense tax pressure as a result of Covid-19, to purchase commodities such as crude oil. This drop in demand will then lower prices. This threat of a strong dollar could continue next year because of the third downside risk to oil prices: rising inflation. It’s no surprise now that the specter of inflation is scaring central banks around the world. Inflation fears result from a multitude of factors such as rising shipping costs, a huge gap between prices paid and prices received, low sales to inventory ratios, historical amounts of money in the form of Covid-19 support packages, and many more. In this inflationary environment, countries around the world are battling rising prices, especially of food, which the Food and Agriculture Organization of the United Nations says is at a 10 years high. Inflation in the United States is among the highest in the world standing at around 6.2 percent, with prices increasing at their highest rate in 30 years. This is not limited to the United States, as inflation rates in the United Kingdom have affected 4.2 percent and the cost of living is increasing at the fastest rate in a decade. For emerging markets, it’s even worse. There has been a wave of interest rate hikes across the world, with New Zealand hitting the rate twice in two months. South Korea has raised interest rates twice since August. Pakistan has also increased its interest rate recently. Rising interest rates will increase the suffering of emerging markets and increase the tax burden. This, in turn, will have an impact on their overall economy and their demand for oil. So while Omicron remains the biggest near-term concern for oil markets, the possibility of a new US-China trade war, the rising dollar, and surging inflation with the rise. interest rates are all long-term systemic risks that markets seem to take into account. be oblivious these days.
By Osama Rizvi for OilUSD
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