The rise in oil prices and the accommodative monetary policy of global central banks caused by the Covid-19 pandemic have been the main reasons for the current inflation growth. Oil has long been the main source of energy, and this trend is far from over, although some countries are trying to replace it with renewable energy sources. This fact is confirmed by data from the IEA (International Energy Agency) that global oil demand will reach 101.6 mb/d in 2023, driven by the recovery of the Chinese economy.
However, the recovery in oil demand could lead to an imbalance in the relationship between supply and demand. On Saturday July 16, Saudi Crown Prince Mohammed bin Salman said more investment was needed in fossil fuels and clean energy technologies to meet global demand.
The prince said Saudi Arabia, the third-largest oil producer, will increase its production capacity to 13 million barrels per day by 2027, up from 12 million currently, and “after that, the Kingdom ‘will no longer have the capacity to increase production”. .”
Furthermore, the Prince added that the adoption of unrealistic policies to reduce emissions by excluding major energy sources will lead in the years to come to unprecedented inflation, rising energy prices, rising unemployment and an increase in serious social and security problems.
Oil market watchers are balancing fears of an economic recession with a sense of impending physical shortages.
The Federal Reserve could cause a recession with ultra-hawkish monetary policy that will drive down global oil production and demand. On the other hand, the Fed could also raise its inflation target to a range of 3-5% and turn on the “printing machine” by 2024 to save the markets. In this case, rising demand for oil and concerns about further increases in supply could push oil prices to all-time highs.
Fortunately, the Federal Reserve is providing the markets with clear guidance on its future monetary policy. At the June meeting, Jerome Powell said the Fed could lower the interest rate by 2024. However, the June CPI released on July 13 added fuel to the fire. The actual numbers beat expectations, sending US inflation to new highs. As a result, economists at Citigroup Inc. said they expect a 100 basis point rate hike as the most likely outcome at the Federal Reserve meeting in late July. But lately, Atlanta Fed President Raphael Bostic and Cleveland’s Loretta Mester have said the Federal Reserve is not planning to raise policy rates by 100 points and prefers to stick with a 75-point hike. basis as expected.
In summary, these two facts highlight the Fed’s intentions to avoid recession in the United States. This is why we can expect the recovery of the oil market to continue.
Who will be most affected?
The economies of major importers will come under severe pressure due to the extreme recovery in oil markets.
1. China: $229.3 billion (22.3% of imported crude oil)
2. United States: $138.4 billion (13.5%)
3. India: $106.4 billion (10.4%)
4. South Korea: $67 billion (6.5%)
5. Japan: $63.1 billion (6.1%)
6. Germany: $40 billion (3.9%)
7. Netherlands: $36.3 billion (3.5%)
8. Italy: $29.9 billion (2.9%)
9. Spain: $29.6 billion (2.9%)
10. Thailand: $25.5 billion (2.5%)
11. UK: $23.9 billion (2.3%)
12. Singapore: $22.7 billion (2.2%)
13. Taiwan: $19.9 billion (1.9%)
14. France: $19.2 billion (1.9%)
15. Belgium: $18.9 billion (1.8%)
As can be seen, the main oil exporters are China, the United States and India. The United States is the world’s largest oil producer, while China and India get Russian oil at a great price.
At the same time, countries like Germany, Netherlands, Italy, Spain, UK, France, Belgium and Japan are not even in the list of top 15 producers of oil. Thus, the economies of these countries are highly dependent on oil prices. The current situation has further proven this as USDJPY has gained 34% since January 2021 and EURUSD has lost 17% over the same period. Another wave of oil price increases could push the EUR and JPY even lower against the basket of major currencies.
Locally, the price fell to 96.00 and rebounded right after. On the daily timeframe, the price formed the descending channel. We expect a breakout and a pump in the 115.00 – 125.00 range in the near term.
XBRUSD monthly chart
If the buyers close the monthly candle above the 125.00 – 126.00 range, the downtrend in the global oil market will be interrupted. In this case, the closest target for “black gold” will be 140.00.
On the other hand, if the sellers protect this level, the price will form a “double top” with the target at 85.00.
On the larger time frame, the area between 145.00 and 160.00 looks like the first critical resistance area for the pair. Until then, the corrections could be seen as a perfect buying opportunity.
The EURUSD broke the global uptrend with the drop to the parity level. With a bounce or not, price will head towards the support at 0.8500.
At the end of the line
The European Union and Japan need more time and resources to calm inflation and halt the downward trend of their local currencies due to heavy dependence on the oil market, which could surprise investors and traders a again this year.
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