Oil in Focus.

Oil in Focus:

Oil Prices Under Further Pressure

WTI crude futures are trading at under $90dpb this morning having fallen close to 10% during the course of the month. The falling price action has mainly been driven by investors weighing on the prospect of economies around the world entering into a sustained recession, particularly within Europe and North America but also reduced demand from Asia. Indeed, China - which is the largest importer of crude oil, accounting for around 25% of the world’s total crude oil imports - have seen a sustained reduction in demand which has a shortfall of upto 2m bpd in lost demand. Additionally, US inventory data out earlier in the month indicated that stockpiles had risen by 4.5m barrels over the course of last week, smashing expectations that they would have declined by over 625,000 barrels. Markets are also considering the implications of a deterioration of diplomatic relationships between the PRC and the US (and the subsequent loss of trade hampering demand). Additionally, investors are weighing on the chances of the revival of the 2015 Iranian nuclear deal bringing some 2.5m bpd onto the global market.

Russia’s Energy Revenues Surge

According to Reuters, Russia has seen a 38% increase in the value of its energy exports brining the value to $337.5bn?- sources from Russia’s economy ministry indicates. While much of this has been driven by the high prices seen in oil and gas, it demonstrates the fact that actors are still using Russian energy notwithstanding its invasion of Ukraine in February. Indeed, many countries including China are continuing to develop their bilateral infrastructure and as recently as February, China National Petroleum Corp. extended their crude oil contract by another 10 years with Rosneft (Russia’s largest oil producer) meaning that China will receive around 200,000 b/d from Rosneft. This latest deal is indicative of the two states’ strategic relationship with one another which according to a recent joint statement from Xi Jinping and Vladimir Putin was described as having “no limits”.

Last year, crude oil exports from Russia exceeded $300m per day with gas accounting for a further $169m each day according to Russia’s state bank. Oil and gas are therefore major sources of income for the Kremlin and following the increase in oil and gas prices last year, at its hight Moscow was able to receive some $500m per day in tax receipts. Accordingly, the vast scale of Russia’s oil and gas receipts account for around 1/3rd of the Kremlin’s budget and analysts at BCS Global Markets in Russia forecast that a $10 increase in the price of a barrel of oil would amount to an additional $60m in tax revenues each day.

Middle East Oil Revenues Spell Higher Growth for Region

This morning the Financial Times are reporting that Middle Eastern countries are forecasted to see an additional $1.3tn in oil revenues through 2026. Gulf states are also seeing returns from investments into oil companies around the world which they invested in during the pandemic when such companies were struggling deeply. The FT also stated that “The bonanza comes after years of subdued growth across the Gulf that caused governments to raise debts, tap into their reserves and slow state projects.”. Given these revenues and subsequent SWF investments, the IMF are forecasting growth amongst Gulf Cooperation Council states (Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain, Qatar and Oman) will rise to 6.4% this year – a sizable move from 2021’s average of 2.7%

Consumer Confidence Slumps while Retail Sales

The consumer confidence survey from GfK has indicated that it is at its lowest level since records begam, highlighting the impact of rising inflation, falling real wages and a poor outlook on the future health of the British economy. The index dropped to -44, which came in well below market expectations and represents the lowest reading since records began almost half a century ago. What’s more, is that the index fell to -55 when the survey focused on consumer’s economic expectations of the year ahead, putting it lower than the 2008 crash. The Major Purchase Index also fell four points to -38 pts, further suggesting that consumers are holding off major purchases given their assessment on the future economic climate and personal finances.?

Meanwhile, retail rales released this morning indicate that m-o-m figures rose 0.3% in July, while the figure was down 1.2% in the period between May and July against the previous three months. Importantly, retail sales volumes were down 3.4% on the year while the value of those sales was up 7.8% over the same period, indicating the prevalence of inflation on Britain’s high street.

German PPI Hits 37.2%

German PPI has print 37.2% this morning on an annualised basis – hitting its highest level since 1949 - as producers grapple with rising energy costs which are up 105% from this time last year. The print has put further pessimism onto the outlook of the German (and thus the EU) economy, as the markets weigh on TTF gas futures hitting all time highs yesterday having appreciated some 55% in the last month alone.??