-Data paint a picture of a not-so-hot recovery
-The Emirati love fest may stir the hornet’s nest.
Not-so-hot economic trends in the Asian economies helped put pressure on the price of oil early Friday. Malaysia’s economy posted a sharp contraction, while retail sales in China were less than impressive. The trend on retail sales carried over to a US economy faltering without a federal lifeline. Trade headwinds were also blowing hard in the European economy, and unemployment was on the rise. All that adds up to a down day for the price of oil, though geopolitical tensions in the Middle East and Mediterranean could add a bit of a risk premium.
The price for Brent crude was wobbling around a flatline early Friday, posting a drop of about a half percent to hit $44.94 per barrel at 8 a.m. ET. The global benchmark for the price of oil is seemingly on the rise, though it’s been stuck in the mid- to lower-$40 range since at least early July.
The Central Bank of Malaysia reported the economy contracted 17.1% year-on-year in the second quarter and 16.5% sequentially. The bank attributed the decline to the sharp drop in tourism revenue due to restricted travel during the pandemic. State control over domestic travel was also prohibitive to growth.
“This resulted in demand and supply shocks that emanated not only from significantly weak external demand conditions, but also production constraints in many economic sectors,” the bank’s statement read.
Analysis from consultant group Wood Mackenzie in late July found that demand for oil products in the Asia-Pacific was expected to drop by 1.8 million barrels per day in 2020. And while demand continues to remain robust in relative terms, the report found the rate of growth over the next two decades will be about half what it was over the past 20 years. Part of that was because of the increase in electric vehicle use and higher fuel efficiency and part of it was because of the pressure from the quarantine economy.
In China, retail sales were a disappointment. China remains more or less isolated in the international community with positive growth this year. OPEC economists in the monthly report for August revised their 2020 forecast for Chinese GDP higher, from 1.3% to 1.8 percent, before recovering to 6.9% next year. The National Bureau of Statistics reported Friday, however, that retail sales slowed in July for the seventh month in a row. Year-on-year, and China’s industrial activity was weaker. Combined with Malaysian woes, and it was a down day in Asian trading.
In Europe, the official statistics office for the European Union, Eurostat, reported that GDP in the second quarter dropped 12.1% in the countries that use the euro currency and 11.7% bloc-wide. Unemployment was on the rise, exports outside the continent dropped by nearly 13% and the exchange of goods between euro zone economies fell by 13.6%. Not to be outdone, retails sales in the United States plummeted from the revised June growth rate of 8.4% to just 1.2% last month, below analyst’s expectations.
Vandana Hari, founder and CEO of Vanda Insights, stated in a note emailed to The GERM Report that confidence in a global economic recovery was starting to fade amid the stubbornness of the pandemic.
“The scenario doesn’t bode well for global oil demand recovery,” her report read.
In the geopolitical arena, the announcement that the United Arab Emirates was warming up to Israel at the behest of the United States may not be the stabilizer you would think. The Emirati pivot shows the tiny Arab nation aims to establish a better standing in the international community. The European Union, and even US presidential challenger and former Vice President Joe Biden, hailed the agreement as a breakthrough for regional stability. But they may be wrong. The Emirati move created an Israeli axis of sorts in the region, clearly demarcating divisions in the region. The Palestinian leadership described the agreement as a stab in the back, while Ankara said it was an abandonment of the Palestinian cause. The timing of the agreement may be seen as a favor to US President Donald Trump, who faces a tough uphill battle in the November contest against Biden. The demarcation, however, leaves the battlegrounds clearly defined. An Israeli axis in the region almost certainly strengthens the identifiable opposition to Iran, but Turkish anger suggests it could drift toward its neighbors and consolidate a viable balancer to the West’s proxy extension via Israel. On Friday, reports suggested that US authorities were attempting to seize vessels laden with Iranian petroleum products bound for Venezuela. The Turkish navy, meanwhile, said it was protecting its sovereign interests in the Mediterranean by escorting a drillship in the region. Continued aggression has only emboldened rather than tamed the Islamic republic, and with Turkey flexing its muscles beyond its immediate neighborhood, tensions in the wake of the Emirati agreement may only escalate, not diminish.