Global Economy and Energy Markets Weekly Commentary – 27th Jun ‘21

Christof Rühl, member of the Advisory Board of Crystol Energy and a Senior Fellow at the Harvard Kennedy School and the Center on Global Energy Policy at Columbia University, discusses the latest global economic and oil market developments in this weekly interview to the Gulf Intelligence. 

Christof comments on the core reason US shale has not returned as fast as expected, which has been because of capital constraints or stricter financial restructuring by shale investors. Regardless, it’s just a delay and shale will be back by Q1 2022.

The other factor influencing market sentiment is what is now an almost unanimous opinion on expectations that the US Fed rate increase of 1-1.5% will happen by 2023. The question is whether markets at some point will sell off due to any uncertainty and create financial instability.

According to Christof, the appetite for risk is still very solid despite these signals from the Fed, simply due to the massive wall of money. Even if markets react adversely, they will bounce back because people have to put their money somewhere. He would expect that as the tapering starts in earnest, we will see more volatility but also the upward drift to continue. The long-term problem will be how to pay off the debt buildup.

We will even see a split within the G7 on economic recovery. The US is growing and so will the UK most likely, but Japan is not so sure. Historically, when Fed policies turn restrictive, they could trigger a crisis in emerging markets or in the corporate sector globally – it’s never certain. But the more the Fed concentrates on what happens in the US, the higher the risk that something goes wrong in emerging markets or with non-triple A rated corporate bonds more broadly.

On OPEC and the upcoming meeting on 1st July, Christof believes that they are likely to make a short-term announcement only and keep options open. They need to err on the side of caution as it’s not clear that demand will bounce back as strongly as projected. If it does cross certain thresholds, they can always release more oil. They will signal flexibility – ready to rein in any rally while at the same time taking as much money off the table as possible.

The start of 2022 is also something to watch – with shale returning, the OPEC agreement expiring and the Fed signaling whether they will raise rates the year after. The economic situation in China, including inflation and its financial sector issues, will make its way back into the news and may not be as stable as some would suggest.