With oil prices demand falling, you might expect oil prices to follow. Not so fast, warns Bloomberg. The main culprit is weakening currencies outside of the US and Europe:
Both OPEC and the International Energy Agency, which represents consumer countries, expect global consumption to increase by about 1.36 million barrels a day next year. That’s a lot less than we have become used to since the price crash that began in 2014, and it’s a more pessimistic outlook than either group had back in July.
It’s not just that crude hit its highest in almost four years earlier this month. For countries like India and China, the main sources of demand growth, the weakening of their local currencies against the dollar has amplified the impact of crude’s rise.
Drivers in India were paying record prices for gasoline and diesel earlier this month, even with crude still about 45 percent below its 2008 peak. That surge prompted the Indian government to cut tax on fuels and ask state-run oil marketing companies to absorb additional price cuts. Chinese drivers have also seen prices at the pump rise by 28 percent over the past year.
Lower oil demand growth forecasts also reflect cuts to the outlook for global economic growth made by the Organization for Economic Co-operation and Development and the International Monetary Fund. President Donald Trump’s “America First” policy has seen the U.S. and China slap tit-for-tat tariffs and other measures on a wide range of goods, while verbal attacks on America’s historic friends have raised worries of a broader slowdown in international trade.
We have the US Federal Reserve to thank for a lot of this, as they have been hiking interest rates steadily and de-leveraging their balance sheet for months now, which has been causing problems in the emerging markets like China, India, and South America.