Why Aren’t Oil Prices Higher?
We are lowering our price target for oil to a range of $50 to $60. This works against recovery of S&P 500 forward earnings, inflation expectations, bond yields and credit spreads. Lack of oil consumption growth in China, matched with surging production in the US, has produced a global glut. The Trump administration, while jawboning low oil prices, is managing the global oversupply by putting sanctions on Iran and Venezuela, transferring market share from them to Texas. Markets have already absorbed most of the loss of Iranian production, and further losses are able to be absorbed by increased US production this year. Russia is stepping in to prevent the Venezuelan oil ecosystem from collapsing, and Saudi’s now well-demonstrated swing capacity hedges against a collapse should it occur. We expect a resumption of Chinese and emerging market oil consumption growth once the trade war is settled, and see that as the only way to stabilize oil prices.