The beginning of a new month failed to ignite positive sentiment in the oil market as prices fell to their worst lows in four years.
The US has resumed tough talk on China with threats of new tariffs to come. In Friday trading, Brent crude was priced around US$61 with WTI above US$54 a barrel.
The oil market took a big hit with both benchmarks falling more than 7% on news of the US tariff increase on China on Thursday.
Fragility of market
The fragility of the market has been tested several times by this issue, as any full blown trade war will impact energy demand growth.
China is one of the world’s biggest consumers, so any cut back in economic activity will threaten global growth and oil demand.
The market appeared to be in summer mood, drifting along quietly, with nothing too dangerous expected to cause much movement. Geopolitical uncertainty seems to be priced in and US stocks were steadily depleting in recent weeks.
The global economic instability was not over pronounced and optimists held out hope for a US reconciliation with China over trade.
The US president, Donald Trump, is getting impatient and having taken to Twitter, said that China needs to move more quickly to agree a trade deal.
Trump said that the country’s President Xi Jinping can act faster and prevent an additional 10% on US$300 billion of Chinese imports.
Trump is intending to implement this additional charge at the beginning of September. This gives the Chinese leader little time to get back to the negotiating table.
Energy demand has been holding up in the US and the economy has been managing to deliver occasional good news and sustained oil production and exports.
Last week, the manufacturing data took a tumble, falling to close to three year lows as construction spending was down and new projects on the decline. US oil demand for May fell by 98,000 barrels a day to 20.26 million barrels a day according to US energy demand data released this week.
All this gloomy news is putting further pressure on the listed oil companies as we’re still in the middle of second quarter earnings season.
It’s been a mixed bag in quarterly and half year profits and figures, and the outlook for the rest of the year is not too optimistic. The US Energy Select SPDR Fund, the XLE, dropped more than 2%.
Depending on who you talk to, lower priced oil stocks should be a buying opportunity, but not all investors are eager to buy.
Fed rate cut
The US Federal Reserve disappointed the markets this week as it cut rates by 25 basis points.
This is the first interest rate cut since the global financial crisis 10 years ago. Stocks in the past would have moved higher on this news and the dollar would have declined. The opposite appeared to happen with a higher dollar and lower stock prices.
The markets had been hoping for a deeper cut and they were not encouraged when the Fed chairman, Jerome Powell added that the central bank was not embarking on an extended period of loosening.
As the committee “seeks to foster maximum employment and price stability” while managing inflation in the US, the Fed press release said that in the June figures, “the labour market remains strong and that economic activity has been rising at a moderate rate".
The market was beginning to be hopeful for China and the US to come to an agreement over trade, but President Trump is clearly not making the first move.
He believes the US administration has negotiated in good faith and he is expecting the Chinese to respond and agree as he is clearly getting impatient. In the meantime, the uncertainty will result in more volatility for the oil market in weeks to come.