Weak Growth Outlook, Iran Sanctions Bring Volatility to Oil Markets

Oil prices were under pressure on Wednesday, as traders grappled with the International Monetary Fund’s murky outlook on global economic growth.

Oil Price Update

Crude prices were down across the board midweek, with U.S. and international futures benchmark trekking lower. The U.S. West Texas Intermediate (WTI) benchmark fell $1.67, or 2.2%, to $73.29 a barrel on the New York Mercantile Exchange. Brent crude was down $1.62, or 1.9%, to $83.38 a barrel.

Despite the recent drop, prices will likely rebound in the near term as the Gulf of Mexico braces for Hurricane Michael, which is currently a Category 4 storm. Current forecasts suggest that the storm will miss the main production areas in the region, though major disruptions to economic activity are expected.

IMF Downgrades Global Growth Outlook

U.S.-China trade tensions and rising import duties are beginning to affect the global economy, according to the International Monetary Fund. The Washington-based lending institution this week lowered its outlook on global economic growth in the next few years, citing several risks to commerce.

The United States and China – the world’s two largest economies – saw their growth outlook slashed next year. IMF officials now expect the U.S. economy to expand 2.5% next year, down 0.2 percentage point from the previous estimate. Meanwhile, China’s GDP growth is forecast to slow to 6.2% in 2019 from 6.6% this year. That also reflects a 0.2 percentage point drop from the prior estimate.

“The impacts of trade policy and uncertainty are becoming evident at the macroeconomic level, while anecdotal evidence accumulates on the resulting harm to companies,” the IMF said in its latest outlook. “An intensification of trade tensions, and the associated rise in policy uncertainty, could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade.”

The fund now projects global growth to be 3.7% in 2019, down from 3.9%. Officials also predicted a downward trend in 2020 and beyond.

Extreme Volatility

BP’s chief executive has warned of “extreme volatility” in oil prices emanating from the resumption of U.S. sanctions on Iran. In a recent interview with CNBC, Bob Dudley said his firm is preparing for “45 days of extreme volatility” in the market where prices can go either way.

Dudley’s comments reflect wider concerns over the impact of Iran sanctions on global crude supplies. Exports from the Islamic Republic declined to 1.1 million barrels in the first week of October, down from 1.6 million in September, according to industry sources. Iran shipped as much as 2.6 million barrels per day in April.  Sanctions against the country’s oil industry will come into force Nov. 4, 2018.

Analysts warn that U.S. sanctions against Tehran could keep oil prices artificially high. Crude is expected to stay above $65 a barrel in the intermediate term and possibly returning to $100 by next year.

Featured image courtesy of Shutterstock. 

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi