Oil and the Smoldering Trade Dispute

Weekly Report - 28/05/2018

Oil, (Crude and Olive)


Last week was one of the more volatile ones we have seen for some time. Volatility is essential for traders to earn. Very few of us can earn when price moves in a channel. Of course volatility is the classic double edged sword because those earnings came with the cost of risk.

The Week that Was

The two oil risks referred to crude of course but the olive oil referred to Italy and the giant though short lived possibility of a coalition of the right and left wing populist parties forming a government. We felt that that could not last a week. It did not last for a moment. New elections are likely soon. The Milan index had plenty of volatility to earn tidy profits last week and it is providing them into this week too. The Crude oil market is weakening and quickly. OPEC which meets on June 19th at its headquarters in Vienna and it will surely have the production quota on the agenda. It has already announced that it is likely to raise that quota to compensate for future missing Iranian and Venezuelan output. The crude price reflects this. But it reflects more than that. If the quota was raised to compensate for lost production, then the net output would be unchanged and price would not fall as it did. What the market understands is that the 2016 OPEC agreement itself is in jeopardy. A disintegration of that agreement will likely bring excessive amounts of crude onto the market and the price will fall. Current price reflects just that.


This Week

The trade dispute still smolders away. Smolder is a word used to describe very low level combustion. Little heat is generated, no flame is present, and smoke is often not evident. However it is a word used to imply impending conflagration. Funny word but apropos of the trade dispute circumstance because the US administration is keeping the dispute on a low flame while constantly suggesting that it could erupt into a full blown trade war that America could easily win. Many of the US administrations economic team resigned their posts due to the fallacy of this point of view. No nation wins in a trade war. There are no winners, but for very transitory gains made by very few selected players. It’s a mug’s game. Increasing volatility in the US Dollar will be with us throughout the week and it’s evinced in the strength of the USD in Europe as opposed to its weakness in Asia, Australia and the NAFTA zone. Finally the on again off again Kim Trump summit does little to settle the jangled nerves of the trading crowd. Watch for continued episodes of this tired drama and their resulting ripple effects in the currency markets.


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