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The outlook in 60 seconds

Covid-19 is still affecting both energy supply and demand, however light is flickering and the end of the tunnel. While OPEC+ has a firm grip on the steering wheel, Iranian oil export is a joker going forward. Public spending and central bank measure continue to have a massive impact on market sentiment.

April Quarterly Report, Geopolitics

Attacks Targeting Saudi Arabian Oil

Last year, Libya was able to increase its oil production significantly after a blockade on oil exports was lifted. This year it might be Iran’s turn. Back in 2018, Iran produced as much oil as 3.83 mbpd, but when former U.S. President Trump pulled out of the Iran nuclear deal, production gradually fell, and in 2020 it was below 2 mbpd.
Now that the U.S. has a new president, Iran has been increasing its production slightly in anticipation of the sanctions relief that would happen if the Biden administration returned to the nuclear deal. However, the negotiations between the two countries seem to be in a stalemate at the moment. Biden has said that he will only return to the 2015 deal if Iran first resumes compliance with the pact by limiting its nuclear operations. Iran, on the other hand, says it will resume full compliance with the pact after U.S. sanctions are lifted.
If the two nations can find a solution and return to the nuclear deal, it might have a significant effect on the oil market. Nearly 2 mbpd of supply could be returning to the market.

 

Iranian Oil Returning to the Market?

Last year, Libya was able to increase its oil production significantly after a blockade on oil exports was lifted. This year it might be Iran’s turn. Back in 2018, Iran produced as much oil as 3.83 mbpd, but when former U.S. President Trump pulled out of the Iran nuclear deal, production gradually fell, and in 2020 it was below 2 mbpd.
Now that the U.S. has a new president, Iran has been increasing its production slightly in anticipation of the sanctions relief that would happen if the Biden administration returned to the nuclear deal. However, the negotiations between the two countries seem to be in a stalemate at the moment. Biden has said that he will only return to the 2015 deal if Iran first resumes compliance with the pact by limiting its nuclear operations. Iran, on the other hand, says it will resume full compliance with the pact after U.S. sanctions are lifted.
If the two nations can find a solution and return to the nuclear deal, it might have a significant effect on the oil market. Nearly 2 mbpd of supply could be returning to the market.

Financials

The main headline within financials continues to be the governments and central banks attempt to support the economy following the large downturn in economic activity caused by covid-19.

 

USA

The U.S. economy continued to recover from the massive blow in 2020 although still not on pre-pandemic levels. From the graphs below, it can be observed that GDP growth and manufacturing PMI have improved in the latest quarters. However, GDP growth YoY continued to be negative in Q4 of 2020 at -2.4%. Manufacturing PMI saw an increase to 60.8 in February from 58.7 in January also surpassing the level of 60.7 from December 2020. Furthermore, the unemployment rate has continued to drop in the latest months to a level of 6.2% as of early March.

On March 11, President Biden signed the 1.9 trillion dollars stimulus bill American Rescue Plan Act after it has been passed in both the House and Senate. The bill includes stimulus checks of up to $1,400 per person dependent on income levels. Among other things, the bill also includes unemployment benefits, child tax credits, funding for schools and businesses as well as money for covid-19 testing and the vaccine program which will help to prevent the spread of covid-19, the main factor for the outlook of the economy. With this stimulus bill, the U.S. government aims to increase spending and employment. Analysts estimate that the stimulus bill could boost the U.S. economy by 2 percentage points over the next two years.

Following their meeting in March, the Fed announced that it will continue to use all its tools to support the U.S. economy. Although indicators of economic activity have turned up, the situation remains uncertain as covid-19 continues to affect economic activity, employment, and inflation. The stimulus bill mentioned previously will boost the U.S. economy thereby also increasing inflation. As of March 17, inflation remains below the Fed’s target of 2%. The Fed decided on their meeting in March to keep interest rates in the range of 0% to 0.25% as can be seen from the graph below.

The Fed expects interest rates to remain in this range until the conditions on the labor market have improved to maximum employment and inflation exceeding 2%. To support the flow of credit, the Fed decided that it will continue its asset purchase program, thereby increasing its holdings of Treasury securities by at least $80 billion per month and agency mortgage-backed securities by a minimum of $40 billion per month.

 

Europe

After a sharp recovery in Q3 2020 following the massive downturn in Q2 2020, the economy within the European Union contracted by a small amount in Q4. GDP growth YoY in Q4 2020 was -4.9% compared to -4.3% in Q3 whereas the growth rate QoQ was -0.7%. PMI in Europe has continued to improve to a value of 57.9 in February compared to levels around 55 in the previous months, all still above the threshold of 50 signaling expansion. Unemployment levels continue to be above levels seen before the pandemic although dropping slightly in the latest months with a current level of unemployment of 8.1%.

The European Central Bank (ECB) decided in March to continue their pandemic emergency purchase program (PEPP). This means that the ECB will conduct net asset purchases totaling €1,850 billion until at least the end of March 2022 or the covid-19 crisis is over. In addition, the pace of purchases in PEPP is expected to be higher over the next quarter compared to the first months of 2021. Furthermore, the asset purchase program (APP) will continue at the same level as long as it is necessary. The ECB expects interest rates to remain at current levels until the inflation outlook converges close to, but below 2% and announced that they will continue to provide liquidity by refinancing operations.

 

China

As opposed to the U.S. and Europe, the Chinese economy has recovered much faster following the effects of covid-19. In terms of GDP growth, China is back above levels seen before the pandemic with a GDP growth rate YoY above 6% in the last quarter of 2020. The PMI index in China has not shown the same high numbers as has been the case in the U.S. and Europe. In the previous months, the Caixin PMI has decreased by a small amount although still above the threshold of 50.

 

The Chinese economy appears to be in better shape than both the U.S. and Europe which could be contributed to strict lockdown measures and stimulus packages to help businesses. Furthermore, investments from the government and the growing global demand for Chinese goods have also helped support the economy.

Summary

Economic activity has continued to recover from the drastic drop that occurred when covid-19 spread around the world at the beginning of 2020. The economic conditions in the U.S. and EU are still below the levels observed before the pandemic while China has managed to recover better. The governments and central banks continue to do everything in their power to support the economy by keeping interest rates low and continuing their massive purchase programs. The situation remains highly dependent on the development in the spread of covid-19 and the vaccines.

 

About the report

How is the report structured? 

The report is divided into three parts – each part elaborates on three main topics which are influencing the oil prices:

  • Geopolitics – covering the situation in unstable oil producing regions of the world
  • Financials – covering speculators’ interest and the development of the financial market
  • Fundamentals – covering the supply and demand balance

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Then send us an email at news@global-riskmanagement.com

 

Contact the Global research team

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