The crude oil market experienced a rough month due to Trump’s aggressive tariffs announcement on April 2 that made the market to expect lower demand on the slowdown in the global economy coupled with higher supply as OPEC+ planned to increase production by more than expected.
We saw a strong rebound though on April 9 as Trump paused the reciprocal tariffs for 90 days and the market expected more de-escalation and started to price out the global slowdown. The delay in reaching the trade deals and fresh positive supply news eventually weighed on the sentiment and prices rolled over once again.
Yesterday, crude oil extended the selloff as we got the news that the Saudi officials have told allies that they can sustain a prolonged period of low prices in what sounded like a threat of a price war. The focus is clearly on supply right now, but a non-consensus trade opportunity could be in the cards.
Global ocean container bookings have seen a significant decline since the tariffs announcement with bookings from China to US being down 60%. If Trump eases tariffs, we could experience a covid-like bullwhip effect where all those cancelled orders get rebooked creating a huge surge.
The expectations for strong demand and a rebound in global growth will likely push prices higher and a rally to the 70.00 handle on WTI wouldn’t be surprising. But being a contrarian is not enough because you have to get the timing right.
Michael Steinhardt, a trading legend, once said that ideally you should be able to tell, in two minutes, four things:
- the idea
- the consensus view
- the variant perception
- the trigger event
The trigger event, in my opinion, could be the details of the first trade deal. Markets will derive future expectations from that first deal. I think an average tariff rate of 10% or lower (the lower the better), would be the catalyst for a rally in crude oil prices. The idea would be invalidated in case we get a higher rate of course.
This article was written by Giuseppe Dellamotta at www.forexlive.com.
