The oil market is understandably in a state of suspense this week, eagerly fixated on the events unfolding in Vienna. But regardless of what happens, the market is in for a potentially rough ride as we head into 2019, with a series of economic headwinds threatening demand.
The S&P 500 is set to peak, corporate earnings are expected to slow, inflation could edge up and U.S. fiscal stimulus is set to fade, according to a recent 2019 forecast from Bank of America Merrill Lynch. The report lays out a series of predictions for next year, many of which center around global economic uncertainty.
The main themes of the report are of a slowing economy in the U.S., combined with already slow growth elsewhere. Global GDP growth is expected to dip from 3.8 percent this year to 3.6 percent in 2019.
In Europe, political and economic stress continues. France has recently been rocked by fuel tax protests. Brexit negotiations are entering a critical phase and Italy is fighting with Brussels over its budget deficit. Germany saw its GDP contract in the third quarter, as did Japan.
China is also facing slower growth. The trade war could flare up once again after the much-heralded Trump-Xi truce expires in three months. In fact, as the details on the most recent trade ceasefire faced more scrutiny, the deal started to look a little hollow. Trump took to twitter, perhaps after he realized that China’s concession were not rock solid, and said that he was “a Tariff Man,” warning them to follow through.
Ultimately, the prospect of a renewed trade war is alive and well, and along with it, downside risks to the global economy.
“The BofA Merrill Lynch Research team is bearish stocks, bonds, and the U.S. dollar; bullish cash and commodities; and long on volatility,” the investment bank said in its report regarding the 2019 outlook.
One of the key backdrops for the global economy in 2019 will be “an unprecedented level of global monetary policy divergence as the U.S. Federal Reserve continues to hike interest rates and other major central banks don’t,” Bank of America Merrill Lynch said in a report. The Fed has been steadily hiking interest rates while the European Central Bank has held off.
The dollar has gained significantly this year as a result, which has ultimately spread volatility throughout emerging markets, weakening currencies and contributing to a flare up in financial stress. Many breathed a sigh of relief when U.S. Fed chairman Jerome Powell seemed to revise his outlook recently, noting that interest rates are close to what the central bank views as “neutral.” Just a month ago he said that rates were very far from neutral. The slight change in wording suggests the Fed could take a less hawkish view on monetary policy, which could be good for growth and may support a weaker dollar.
As such, it’s not all bad news. BofAML says that emerging markets are so oversold that they could see a big rebound in 2019, helped along by a weaker dollar.
Nevertheless, the economic headwinds look much more formidable heading into next year than they did at the start of 2018.
The implications for the oil market are profound. OPEC+ is trying to get a handle on a burgeoning supply glut, which has been made worse by downward revisions in demand. Still, global oil demand has been affected much less than might be implied by the bout of economic volatility that has unfolded recently. The IEA has twice revised its 2018 figures down, but only by around 200,000 bpd. In its November Oil Market Report, the agency noted that “a deteriorating outlook for the global economy is largely offset by the fall in Brent crude oil prices.” In other words, oil prices fell because a worsening economy implied lower demand, but lower prices themselves helped keep demand aloft.
As a result, oil prices might not necessarily fall from current levels even though the economy could take a turn for the worse. “We forecast Brent and WTI crude oil prices to average $70 and $59 per barrel, respectively in 2019,” BofAML concluded.
By Nick Cunningham of Oilprice.com
