The IMF’s Latest Report Could Spell Disaster For Oil Markets

By Nick Cunningham

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The International Monetary Fund slashed its global growth forecast once again, predicting economic growth will fall to its weakest rate since the financial crisis a decade ago.

The IMF said that the world economy is in a “synchronized slowdown,” and will only expand by 3 percent this year. At one point last year, the IMF forecasted 3.9 percent growth for 2019. “Growth continues to be weakened by rising trade barriers and increasing geopolitical tensions,” the Fund said in a statement.

Needless to say, the ongoing U.S.-China trade war looms large in the analysis. “We estimate that the US-China trade tensions will cumulatively reduce the level of global GDP by 0.8 percent by 2020.” There are country-specific problems in emerging markets (Argentina, Iran and Turkey, for instance), but the world is also facing structural issues, such as low productivity growth and aging demographics, the IMF added.

A dramatic slowdown in trade and manufacturing have forced several consecutive downgrades in GDP predictions. Also, various geopolitical landmines could make things worse. The U.S.-China trade war is highly unpredictable and could deteriorate again, while the Brexit mess could yet blow up and derail the European economy.

The problem for the global economy is that once things start to slow down, there is a bit of a negative compounding effect that could trap the world into slower growth. Another blow to growth from, say, a no-deal Brexit or more trade barriers could be “an abrupt shift in risk sentiment, financial disruptions, and a reversal in capital flows to emerging market economies,” the IMF said. “In advanced economies, low inflation could become entrenched and constrain monetary policy space further into the future, limiting its effectiveness.”

For the four largest economies – the U.S., China, the Eurozone and Japan – the IMF sees no improvement in their growth prospects over the next five years.

This helps explain the pessimism dominating the oil market right now, which is vastly overshadowing a more nuanced picture on the fundamentals.

While most forecasters see a problem of oversupply next year, the market has tightened up in the interim. In a report, Commerzbank pointed out several factors that have failed to move the needle on oil prices. The “robust Chinese crude oil imports reported for September yesterday are being ignored by the market, as is the military escalation brought about by Turkey’s invasion of the Kurdish areas of northern Syria,” the investment bank said. Syria is a negligible oil producer, but unrest in the region could potentially spill over into northern Iraq, Commerzbank said.

Meanwhile, U.S. shale production has flatlined this year, ending years of explosive growth. The rig count has fallen sharply and companies are cutting drilling and spending. “We believe the lower activity during 2H19 could put downward pressure on 2020 US oil growth,” Goldman Sachs said in a note, although the bank said that the largest companies are still going full speed. “Notably, we still anticipate healthy, double-digit production growth for many of the key US shale operators/US majors.”

The lower-than-expected production growth from shale drillers could result in a supply/demand picture that is tighter than once thought.

However, even with significant geopolitical risks to supplies in the Middle East and a slowing U.S. shale sector, oil prices have failed to rally in any meaningful way. Brent started off this week below $60. The weakening global economy is the overarching concern right now.

In fact, even as the IEA downgraded its 2019 oil demand estimate last week to just 1 mb/d – the weakest growth rate in years – it may still be overestimating demand. “The lack of any significant downgrade to the IEA forecasts is doubly surprising given the downward revisions in the latest OECD Interim Economic Outlook, which is embedded in the IEA demand model,” Standard Chartered wrote in a note.

By Nick Cunningham of Oilprice.com

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