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Crude Oil Price and NOK Outlook Bearish on OPEC, Trade Wars

Crude Oil Price and NOK Outlook Bearish on OPEC, Trade Wars

2019-12-04 04:00:00
Dimitri Zabelin, Junior Currency Analyst
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Crude Oil Prices, Norwegian Krone, OPEC, Trade War – TALKING POINTS

  • Crude oil prices, Swedish Krona, Norwegian Krone may suffer in the week ahead
  • Traders eyeing OPEC meeting in Vienna as members debate deep production cuts
  • US trade tensions with EU, China, Brazil Argentina could also pressure crude oil

Learn how to use political-risk analysis in your trading strategy!

Crude oil prices along with the Swedish Krona and petroleum-linked Norwegian Krone may fall on the OPEC meeting in Vienna as global trade tensions escalate. While members of the oil cartel are expected to cut extend their production cuts, it remains to be seen whether the upside pressure of tighter supply can overwhelm the downside forces of trade wars and geopolitical risks. The data says “no”.

Trade Wars Are Not Fun or Easy to Win

US-China trade relations remain tense following US President Donald Trump’s approval of the controversial Hong Kong bill he signed last week. Beijing has vowed to retaliate with unspecified counter measures, and the levers they have at their disposal could send a chill down the global economy’s spine. To add onto that, the US has reopened the economic battle front with Europe and a new one with South America.

In response to France’s digital tax on US tech corporations, the White House proposed retaliatory tariffs of up to 100% on approximately $2.4 billion worth of French imports. The concern now is the EU will retaliate, leading to a cross-Atlantic trade war against the backdrop of a global slowdown. As it stands, the European economy is already showing tepid growth that would only worsen if a trade spat ensues.

Mr. Trump also announced the restoration of steel and aluminum tariffs against Brazil and Argentina, the largest and second-biggest South American economies, respectively. He claims that the weak currencies in those counties has hurt US businesses. The painful irony is that the Brazilian Real has weakened against the US Dollar in large part because of Mr. Trump’s trade war as well as domestic political turmoil.

OPEC Vienna Meeting

Members of the Organization of Petroleum Exporting Countries (OPEC) are expected agree to extend their production cuts of 1.2 million barrels a day for three additional months. Saudi Arabia, the largest contributor of the group is expected to curb production by 300,000 bpd to 10 million bpd. For Riyadh, the pressure to boost crude oil prices is particularly high in light of the upcoming IPO of Saudi Aramco.

Chart showing Crude Oil Production

There is also growing tension in the cartel as Nigeria, Russia and Iraq continue to pump above their allocated levels, leaving Saudi Arabia to bear the brunt of lower production. OPEC also has to contend with the surge in US shale production which has contributed to the supply glut. Looking ahead, traders will be carefully monitoring internal politics as well as key comments from officials on Thursday and Friday.

Data to Watch for in Europe

As the primary export-destination for most of Sweden’s and Norway’s cross-border sales, the growth trajectory of Europe has a reverberating effect on Nordic FX. Key data to monitor this week against the backdrop of EU-US trade tensions include PMI data, retail sales figures and GDP statistics. Year-on-year, the eurozone is expected to have grown 1.2 percent (unchanged). A softer print could hurt NOK and SEK.

Sweden Economy Forecast

Swedish manufacturing PMI will likely echo this week’s earlier print showing a greater-than-expected contraction. Weakening demand from their core client – Germany, and to a certain extent all of Europe – has not helped the export-driven economy; and traders are noticing. Since November 4, there has been a downward shift in the implied policy rate in the 1 to 3-month tenors.

This comes despite the Riksbank’s determination to hike rates at least once this year, bringing the benchmark lending rate to zero percent and out from the abyss of negative rates. However, there is no guarantee that prevailing economic conditions won’t force policymakers to undo their progress. Riksbank officials also have to contend with what tighter credit conditions would mean for Sweden’s ballooning housing market.

Chart showing Housing Index

Values Legend: Below -1.5: Depressed Between -1.5 and -0.5: Undervalued Between -0.5 and 0.5: Fair-Valued Between 0.5 and 1.5: Overvalued Above 1.5: Bubble Risk

Norway Economic Activity

NOK may rise if industrial production data on Thursday shows increased economic activity as market buoyancy continues to remain – despite mounting fundamental obstacles – resilient. Norway’s oil-based economy has benefited from the recent rise in crude oil prices, though upside gains may be curbed by OPEC’s outlook against the backdrop of the growth-sapping US trade war with Europe and China.

NORDIC FX TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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