Causes and Implications of Recent Fluctuations in oil prices

Saudi Aramco slashes fuel prices substantially

Oil markets failed to maintain the bullish trend seemed evident since the beginning of this year, and weak prospects for global growth may continue to put pressure on prices amid the ongoing trade dispute between the United States and China, the world’s largest consumers of crude oil.

Oil markets and global equities are falling as Europe heads to the polls amid new economic gloom, in the wake of the renewed trade war between China and the United States, and the delay of the Brexit deal.

“Markets are trapped in a full storm of political turmoil in the UK, trade wars between the United States, China, and European economic fragility,” said Connor Campbell, Financial Analyst at Spreadex.

Unstable Trends

US oil futures closed higher on Friday, replacing some of the previous day’s losses as they settled at their lowest level in more than two months. However, prices recorded their worst weekly drop so far.

Traders continue to measure the risk of slowing energy demand as to the continuation of the United States and China trade dispute. WTI crude oil rose by 1.83% to $58.87 a barrel to settle at $58.97 a barrel on the New York Mercantile Exchange (NYMEX). After a 5.7% drop on Thursday, while monthly contract prices lost 6.8% for the week.

In contrast, the WTI and Brent crude oil rallied on the worst daily and weekly declines in six months as oil and equity markets were hit hard on Thursday by rising tension in the US-China trade war, raising investor concern about the state of the global economy. A day after the Energy Information Administration announced an increase in US crude inventories.

Oil prices hit their strongest weekly drop this year amid growing concern that the US-China trade frictions will escalate, threatening global demand for crude oil, as US inventories unexpectedly reached their highest level since July 2017, rising supplies amid the uncertainty of the markets.

WTI fell below $60 a barrel for the first time since the end of March, while Brent crude fell below $70 a barrel for the first time since early April.

US crude oil, which hit $61 on Thursday, suffered its worst day since the Christmas Eve crash on Wall Street, falling nearly 6% to $57.91 a barrel, down 13% since closing at $66.30 a barrel a month ago.

Analysts blamed the sharp sell-off; Ryan Fitzmaurice, energy strategist at Rabobank, said: “Oil inventories are accumulating with fears of a global economic slowdown and the market is now at risk.”

The decline below the next support level for WTI expected at $56, is likely to be accompanied with a further decline in stocks, which will be largely tied to unresolved trade issues between the United States and China.

Why prices have fallen?

“Last Thursday was a risky day with global stock markets falling,” said Marshall Steves, an energy market analyst at Informa Economics, pointing out that the uncertainty about trade negotiations has a negative impact on financial markets of all kinds, including equities, and certainly oil futures.

Market participants said rising trade tensions between the world’s biggest economies, the United States, and China, raised doubts about the desire to buy crude oil in the near term if the tariff dispute remained unresolved for a long time. Commodity investors fear tariff tensions could intensify the global economic slowdown, which seems to be already possible in Europe.

US stocks, the Dow Jones industrial average (DJI) fell by1.11% and the Standard & Poor’s SPX500 fell sharply by 1.19% on Thursday, while shares in Europe and Asia also fell.

“If the trade war is not resolved or any promising progress achieved, oil prices will remain low,” said James Hatzigiannis, senior commodities associate at Long Leaf Trading Group, who also pointed that If there are no further supply disruptions in the Middle East, WTI can certainly fall as US stocks rise above the five-year average.

On the supply side, oil prices have fallen since Wednesday, after the US Energy Information Administration reported that US crude oil supply rose by 4.7 million barrels for the week ending on May 17, recording the second consecutive weekly rise, and raised the possibility of creating another abundance in Oil markets, such as those that caused the fall of crude oil in the falling market late last year.

Inventories in Cushing, Oklahoma, the US crude futures delivery center, hit their highest level since December 2017, government data showed.

Trade War Developments   

Oil prices, which rose on Friday after falling on Thursday, were in line with other parts of the stock markets after the US Department of Commerce put Huawei Technologies, the world’s largest smartphone maker, on the so-called black list.

US President Donald Trump said Thursday that US complaints against Huawei could be solved in a US-China trade deal. Trump also described China’s telecom giant as “very dangerous.”

US officials have already imposed trade restrictions that effectively prevent US companies from dealing with Huawei, the world’s largest maker of telecommunications network equipment, amid further concerns about national security.

Also on Thursday, spokesman for the Chinese Ministry of Commerce, Gao Feng, called for a fair trade environment after new sanctions were imposed on 10 Chinese companies, urging the United States to change its policies, and the CNBC report quoted Feng as saying early on Thursday: “The US campaign is not only causing serious damage to normal trade cooperation between the two countries, but also poses a major threat to the security of the global industry and the industrial supply chain.”

After weeks of fruitless negotiations and more reprisals imposed by the world’s two largest economies, China said talks on resolving the trade dispute could not be resumed until the United States tackled its “wrongdoing”.

“If The United States wanted to continue negotiation, it must, sincerely, control its misconduct.” a spokesman for the Chinese Ministry of Commerce said.

“President Trump seems to have concluded that maintaining a tough stance against China is better than reaching a quick and narrow deal,” wrote Louis Alexander, chief economist at Nomura in a note to clients, adding: “There is a “high risk” tariff that will remain in effect until the end of 2020. Even before the imposition of the new tariff, the current tariffs have already reduced global economic growth.

Growth risks    

The Organization for Economic Co-operation and Development (OECD) said last week that global economic growth had stabilized but remained weak after a “drop” in the rate of increase in trade in goods and services, underscoring the dispute between the United States and China as one of the biggest risks to the global economy.

 The Organization, which expects global growth of 3.2% in 2019, the second lowest since 2012 and of 3.4% for the next year, pointed out in its economic forecast that the growth of trade in the first quarter was the weakest – and barely remained in the positive zone since the first three months of 2016.

Although earnings and economic data so far this year have not been as bad as expected, analysts expect the worst to happen. The decline in manufacturing growth in the United States on May, which showed the weakest pace of growth in almost a decade, increased public concern in the markets, leading to the DJI fell about 400 points on Thursday.

The IHS Markit data released on Thursday showed that business activity “slowed sharply” in May due to trade war fears. US business activity fell to the three-year lowest level and new orders for manufacturing fell for the first time since August 2009.

The energy market could be further pressured if the trade war continues to escalate. In a report published Monday, the chief economist of Morgan Stanley, Chetan Ahia, warned that “the global economy is heading for recession” if the United States imposed a 25 percent tariff on all imports America of China.