While everyone in the oil complex sees upside risks to Chinese growth and the consumption recovery supporting higher oil prices, today's rally is moving beyond the China border as lower inflation impulses encourage a soft landing as the Fed is more likely to pause.
And it also creates a better-behaved rates market with favourable spillovers to speculative risk-taking as the return of absentee liquidity is a welcome relief to the oil community. You can sense that traders are moving away from risk management to an alpha-generating regime, especially on the paths of least resistance.
Oil was getting held back in Asia by weak China export data. But the silver lining is that exports are stabilizing. Despite the 6-month streak of contraction, the pace decelerated markedly, and the outcome exceeded the consensus.
The war in Ukraine and sanctions against Russia continue to expose supply vulnerabilities, which should continue to underpin markets as demand in China and Europe begins to recover. But with the broader market daring to dream of a global cyclical upturn, we may be faced with low inventories, inelastic supply, and much higher oil prices sooner than expected.
If you have not noticed, this is no normal cycle, and some of the standard playbook assumptions will not work this time. Despite the cooler global economic outlook, the peculiar oddity is that commodity prices are holding up well, supported by China's policy U-turn amid a more growth-friendly Politburo, a softer US dollar outlook and green energy demand for some commodities.
For oil prices, specific supply considerations, such as the Ukraine conflict or OPEC's determination to keep crude prices firm, provide significant price planks; indeed, the OPEC put is still alive and well.
The latest oil price recovery is a particularly notable development, which at the very least, raises some doubts about the talk of a global recession.
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