Concerns over a potential sharp economic slowdown are overshadowing support from supply disruptions due to OPEC’s production cutbacks and from U.S. sanctions on Iran and Venezuela.
The outages in Venezuela and Iran, along with the strong production cuts from OPEC+, are undoubtedly tightening up the oil market. The one thing holding back oil prices seems to be concerns about the global economy and how the U.S.-China trade war might impact that outlook.
Oil prices bounced around on recent murmurings about the trade negotiations, up on positive news, quickly down when it seemed that the talks were souring.
Brent crude oil futures were at $66.73 per barrel at 0752 GMT, down 30 cents, or 0.5 per cent, from their last close. It rebounded to $66.76 at 1700GMT.
U.S. West Texas Intermediate (WTI) futures were at $58.69 per barrel, down 35 cents, or 0.6 per cent, from their previous settlement. But it rallied to $59.00.
Both crude oil price benchmarks have slumped by almost three per cent since last week, hitting their highest since November 2018.
“Oil remains in a tug-of-war between fundamentals and a fickle sentiment in the global financial markets,” said Vandana Hari of consultancy Vanda Insights in an interview with CNBC.
Concerns about a potential U.S. recession emerged Friday after cautious remarks by the U.S. Federal Reserve caused 10-year treasury yields to slip below the three-month rate for the first time since 2007.
Historically, an inverted yield curve – where long-term rates fall below short-term – has signalled an upcoming recession.
Adding to concerns of a widespread global downturn, manufacturing output data from Germany, Europe’s biggest economy, shrunk for the third straight month.
“Estimates for growth and earnings have been revised down materially across all major regions,’’ said U.S. bank, Morgan Stanley.
ANZ bank said the darkening economic outlook “overshadowed the supply-side issues’’ the oil market was facing amid supply cuts, led by producer club OPEC as well as the U.S. sanctions on Venezuela and Iran.
The Organisation of Petroleum Exporting Countries (OPEC) and non-affiliated allies such as Russia, together referred to as ‘OPEC+’, have pledged to withhold around 1.2 million barrels per day (bpd) of oil supply this year to prop up markets, with OPEC’s de-facto leader seen to be pushing for a crude price of over $70 per barrel.
The fundamentals of supply and demand in the oil market appear to be heading in a bullish direction. But that trajectory is completely at the mercy of the global economy, which is exactly why there is so much emphasis on the outcome of the trade talks between the U.S. and China.
