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Fed Shift in Monetary Policy and Impact on Energy Stocks
Energy stocks gained over the tentative deal on border security funding where the markets are trying to acquire more information about the new trade developments and how US-China can find a deal before March-end deadline. Brent was 2 percent up over OPEC production cuts where Saudi Arabia said it would produce by over half a million barrels in a day. On Feb. 13 the prices gained for the third day where the gains were capped over steep declines in the US retail spending almost in a decade raising fears of an economic slowdown.
Weak retail sale data of the US that was one of the biggest drops in over a nine-year till December indicated the economic issues are further increase due to the amplification in the number of Americans filing for unemployment benefits in the last week.
There was the prediction that increases in oil production by the US and slowing global economy can put pressure on crude in 2019 where OPEC decided towards production cuts to regulate prices.
The IEA that coordinates the energy policies estimates the oil demand in the year will remain unchanged at 1.4 million barrels per day. The global supply fell 1 percent to 950,000 bpd, in the month of December 2018 led by the OPEC decline in output even before the actual cut plans were implemented. Higher oil prices can offset lower economic growth. Last year the price of crude grew 20 percent driven by the prospects of a decline in the supply from OPEC, and the leading exporter was Russia. The OPEC Plus group agreed to reduce production by over 1.2 million barrels per day and Saudi Arabia said it will cut production more in March than the deal proposes. IEA expects the non-OPEC production growth to stay at 1.6 million bpd in this year that was 2.6 million bpd in the last year.
Venezuela crisis and Iran related petrodollar clashes
The involuntary decline in OPEC supply over Venezuela and Iran crisis, and low production from Saudi, UAE, and Kuwait, can lead Brent to average at $70 in 2019 as per the Bank of America analysis. The clash over petrodollar and shift in monetary policy of the US Federal Research can cause a fall in interest rates and weaken dollar providing backup for gains in commodities and precious metals. As per the data from CME group traders, there are indications of no further hike in interest rates through January 2020.
Inflation is the key issue where the Fed may have to reverse its position and change its stance of monetary policy where inflation rates have failed to materialize. Due to the increase in trade issues, strengthening the dollar has been one of the reasons for the increase in inflation. A restriction on rate hike can increase pressure on the dollar, especially, against the Euro where the ECB concluded the quantitative easing program to support the European economies.
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