Hey Oil Bulls - How Long Till Increasing Oil Prices and Strengthening Dollar Start Killing Demand in Developing Countries?

[Tom Kirkman + 8,860]

Just a gentle nudge about something I've repeatedly commented about this year...

As oil prices nudge higher, the growing consensus seems to be toward $80 oil prices (Brent, not WTI).

My own view is $80 oil is not sustainable, it is too high.  My preferred range that I view as sustainable this year is around $65.  Note, that $65 number is not my prediction, it's what I see as a reasonable price range that is not too high to hurt many global economies, and not low to hurt many oil producers.

Anyway, here's the gentle nudge:

Why Higher Oil Is Hurting Emerging Markets So Much (USO)

Oil prices are up over the past year, which is bad if you’re, say, a developing country that imports a lot of the stuff.

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But the US dollar (aka the petrodollar) is also up, which compounds the problem because oil is priced in dollars. So Brazil, for instance, finds itself buying an appreciating necessity that’s priced in an appreciating currency. The result is serious trouble for at least some countries in that position.  

... To sum up the dynamic: Rising oil prices lead to disruptions which force the local government to increase fuel subsidies, which weakens the local currency versus the dollar, which raises oil prices further, which causes disruptions, and so on, until the country turns into Argentina.

[JunoTen + 118]

Developing countries want to get the price as low as possible and they're starting to organize... I hope they will do that buyers club thing and work closely with the US as a means to lower the prices from OPEC and Russia. The prices are artificially high due to OPEC cutting output and are at a level that is unjustifiable, especially at the era of electric vehicles.

[Jan van Eck + 7,558]

But remember that in Brasil the autos are designed to run either off gasoline or off ethanol, manufactured locally from sugar cane.  Assuming there is enough of the stuff, as oil gets pricier, you have product substitution with the alcohol.  OK< that does not resolve uses of diesel, lube oil, greases, other industrial chemicals, and plastics feedstocks.  Yet, gasoline and transport fuels are the big heavy hitters, so as that oil transfer price continues to rise (with an appreciating currency to work against), you can anticipate a sustained shit to a compatible drop-in fuel. 

Will product substitution save Brasil?  I dunno.  But it sure can't hurt to have that nice fat stock of alcohol out there. That cane grows fast enough. 

[Sebastian Meana + 278]

In a new world where the production of oil is directed more to chemical industry (those future cars maded of zylon and carbon fiber reinforced thermoplastic are basically oil) the alternative biofuels powered cars are dead, because we have not only the gulf that dominated the oil and gas production. All agrofuels, and agriculture based plastics are more expensive, and very likely worse for the enviroment, using wood emits 3 to 4 times more carbon dioxide than LPG

"We" also have a lot of (future) competitors in the new fields, Russia, Argentina, the US, Canada, Australia, some parts of Africa, those countries have shale, and offshore oil, and with technology improving everyday is possible making oil cheaper, even if all priced were leveraged there's going to be a country offering cheaper oil to sell more.

You know why Russia is so concerned with Nuclear floating powerplants? because they could produce electricity at 20 U$S/MWh, that lowers the cost for extraction of oil providing the platforms with cheap energy to make more cheap energy...

In the years to come the extraction of shales trough Water, and be replaced with supercritical CO2, heater at high temperature and pressure, and then cooled down to make the Oil condense and the co2 evaporate to be compressed again.

Demand isn't going to being reduced, since 2014 the oil consumption raised from 76 million barrels a day to 99 million barrels a day and is going to be like that until the 2100's. What's going to be reduced is profits, the days when a country produces a barrel at 30 dollars and sells it at 100 or 140 are over. There's just more competition.
 

Edited June 19, 2018 by Sebastian Meana

[Groovy 0]

Tom,

When you speak about the reasonable price of USD65 do you have WTI or Brent in mind?

[Tom Kirkman + 8,860]

2 minutes ago, Groovy said:

Tom,

When you speak about the reasonable price of USD65 do you have WTI or Brent in mind?

Brent. 

WTI is a different animal altogether.  

[DanilKa + 443]

Brent and USD should not be going in a same direction, if one considers crude as a commodity. But they do lately - makes you wonder about that The Big Oil  Long theory of Chris Cook and tie between crude and USD (not the petrodollar). 

Strong dollar may be enough to crash emerging markets; high energy cost will make it happen sooner

[Tom Kirkman + 8,860]

1 hour ago, DanilKa said:

Strong dollar may be enough to crash emerging markets; high energy cost will make it happen sooner

Yep. A strong USD combined with too high oil prices will eventually throttle global economies, and cause oil prices to eventually drop again.

[DanilKa + 443]

35 minutes ago, Tom Kirkman said:

Yep. A strong USD combined with too high oil prices will eventually throttle global economies, and cause oil prices to eventually drop again.

Except this time it may be different from boom-bust cycles of the past. Global economy is so fragile with $247T in debt - its unraveling seriously frightens me. What gives some comfort - people will still need energy and I know how to extract it from the ground. 

[Tom Kirkman + 8,860]

A bit of an update, although my intent is the exact opposite of what the headline says.  Higher oil prices eventually kill demand growth:

Global Oil Supply Could Become ‘’Very Challenging’’

The demand side of the equation has also slowed, a development that is just as significant. In the first quarter of 2018, demand grew at a staggering 1.8 million-barrel-per-day rate. But that has slowed dramatically to just 1 mb/d in the second and third quarters. The IEA said part of the reason for the drop off is that the figure for the second and third quarters is compared to year-ago figures that were rather high, which makes the increase for this year look less impressive. In OECD Europe, demand in the second quarter actually declined year-on-year.

But the slowing of demand can’t simply be chalked up to statistical idiosyncrasies. Higher oil prices – Brent was up roughly 45 percent – have started to impact consumption. In the U.S., demand growth halved from the first to second quarter of this year.

[Dan Warnick + 6,100]

Falling/failing currencies/economies/governments don't encourage consumption.  Quite the opposite.  Didn't one of our friends on here give some information about gas coupons or some such thing in Venezuela not long ago?  Jan posted a video link to a story about the average person down there, and it was pretty obvious that people who are starving are not putting money into the tank of anything.  

[Nadeem Naseem + 5]

On 8/13/2018 at 7:34 AM, Tom Kirkman said:

A bit of an update, although my intent is the exact opposite of what the headline says.  Higher oil prices eventually kill demand growth:

Global Oil Supply Could Become ‘’Very Challenging’’

The demand side of the equation has also slowed, a development that is just as significant. In the first quarter of 2018, demand grew at a staggering 1.8 million-barrel-per-day rate. But that has slowed dramatically to just 1 mb/d in the second and third quarters. The IEA said part of the reason for the drop off is that the figure for the second and third quarters is compared to year-ago figures that were rather high, which makes the increase for this year look less impressive. In OECD Europe, demand in the second quarter actually declined year-on-year.

But the slowing of demand can’t simply be chalked up to statistical idiosyncrasies. Higher oil prices – Brent was up roughly 45 percent – have started to impact consumption. In the U.S., demand growth halved from the first to second quarter of this year.

Instead of demand growth percentages, can we talk of absolute demand figures. Apparently absolute demand is still going up. 

[Tom Kirkman + 8,860]

5 hours ago, Nadeem Naseem said:

Instead of demand growth percentages, can we talk of absolute demand figures. Apparently absolute demand is still going up. 

Not for long.  What goes up must eventually come down.

Seems to me the bell curve is darn near to cresting and then heading for the down side of the rollercoaster.

The “Weakest” EIA Report In Years

The EIA just published one of the “weakest” weekly oil reports in years, which suggests troubled waters ahead for the global oil market.

... These currency troubles could severely undercut global oil demand. Not only are crude oil prices close to multi-year highs, but the strength of the dollar and the relative weakness of a variety of currencies in the developing world, combine for a toxic brew to demand. 

[Tom Kirkman + 8,860]

Update, today the Oilprice main news site has an article addressing this:

Emerging Market Contagion Threatens Oil Market

A whole range of currencies have lost ground this year, rattling financial markets and forcing central banks to hike interest rates.

Another way of saying the same thing is that the dollar has strengthened on the back of rate tightening from the U.S. Federal Reserve, which has battered currencies across the globe. This underscores a deeper problem with the global economy: After a decade of near-zero interest rates, how does the U.S. central bank withdraw extraordinary monetary stimulus without wreaking havoc on the global economy?

The stronger dollar hits emerging markets in several ways. First, it directly knocks down emerging market currencies in terms of their value against the dollar. But, from there, the problem gets worse. A weaker currency makes dollar-denominated debt in these countries much more expensive and much harder to pay off. That can slow down the economy because businesses have to cut back, consumers have trouble paying off debt, the risk of default rises and everything slows down. Add to that the fact that governments need to guard against macroeconomic instability, which is to say, governments have to slash spending and central banks have to hike interest rates in order to staunch the outflow of capital, rein in inflation and defend their currencies. Economists argue these orthodox policies can right the ship, but they come with a cost.

... The upshot for the oil market is that demand will likely need to be revised lower. A general emerging market slowdown will crimp demand by itself, but currency trouble will magnify the effect. Because oil is priced in dollars, the severe drop in currencies makes oil incredibly expensive, so consumption takes a big hit.

[Mark Walton 0]

Any large Projects happening in Renewables in U.K. market, as Oil & Gas in U.K. been quiet for well over 2 years now....?

[Tom Kirkman + 8,860]

10 minutes ago, Mark Walton said:

Any large Projects happening in Renewables in U.K. market, as Oil & Gas in U.K. been quiet for well over 2 years now....?

@Mark Walton it looks like you inserted the wrong URL in your link, it leads to this thread.

[Tom Kirkman + 8,860]

I started this thread 3 months ago.  So to answer my own question in the thread title:

Hey Oil Bulls - How Long Till Increasing Oil Prices and Strengthening Dollar Start Killing Demand in Developing Countries?

... it appears that it took 3 months.

 

Emerging Markets Slammed By Soaring Oil Prices

US consumers may be cursing rising gasoline prices which are rapidly approaching an average of $3.00 across the nation as Brent hits a new 4 year high above $84, but that is nothing compared to the horror that motorists across most emerging markets are facing. 

With currencies across the developing world tumbling as a result of a toxic mix of global trade tensions, the strong dollar and rising U.S. interest rates, dollar-denominated crude has become all the more expensive. And while the price of Brent crude, the international oil price gauge, has risen by 22% this year in dollar terms, its cost has doubled if you’re buying in Turkish lira. It is up 39% in Indian rupees and 34% in Indonesian rupiah. And don't even mention Argentina.

The soaring prices are forcing emerging-market countries and central banks to act. According to the WSJ, India, the world’s third-biggest oil importer, is weighing temporarily limiting oil imports, while Brazil and Malaysia have introduced fuel subsidies. On Thursday, central banks in Indonesia and the Philippines both raised interest rates to tame rising inflation.

In South Africa, where fuel prices are at a record high, the central bank said in a statement last week that “the impact of elevated oil prices and a weaker exchange rate on domestic fuel costs is increasingly evident.”