Crude oil (WTI/May 19) closed around 59.04 in the US session Friday, tumbled almost -1.57% on the concern of lower demand amid worries of synchronized global contraction. This follows after terrible manufacturing PMI data from Germany as-well-as soft PMI from the US released Friday. The risk-on sentiment was also under stress on growing European political jitters including Brexit and rise of Eurosceptic sentiment across the Eurozone (Netherlands, Hungary, Italy, Spain, France and even in Germany) coupled with lingering Trump trade war uncertainty and resultant global slowdown.
The yield on the German 10-year Bund briefly turned negative in the wake of the disappointing data coupled similar negative JGB yield in Japan and lower US bond yields/flattening/inversion, all of which are indicating an imminent economic slowdown/deflation, even if not outright recession. And add to it the deluge of subdued guidance from various US/EU MNCs and Fed/ECB’s subdued forecast of economic growth (GDP) in 2019, the market is worried about a synchronized global contraction.
But, although there is increasing flattening/inversion of the US bond yields, it’s may not be a definitive sign of a looming recession. It may be more due to central bank presence in the bond market and QT tapering, coincidental to sudden about the turn of Fed (from moderately hawkish in January to ultra-dovish in March).
On late Sunday, Chicago Fed President Evans said: “The curve's sharp was more a reflection of a secular decline in long-term interest rates rather than a signal of impending recession. Some of this is structural, having to do with lower trend growth, lower real interest rates. I think, in that environment, it's probably more natural that yield curves are somewhat flatter than they have been historical”.
Oil made a session low of 58.28 on Friday and well-off the recent high of 60.39 made on Thursday amid OPEC+ cut optimism, Venezuelan and Iranian shortage coupled with surprised inventory drawdown report (EIA as-well-as API). Overall, oil jumped around +0.89% last week and over +3% in March (till day) after almost +25% surge in the last two months (January/February’19). Although, a dovish Fed (lower USD) is positive for oil, the reason behind the Fed’s sudden flip-flops (dovishness); i.e. the concern of slowing US/global economy is negative for oil.
Apart from US-China trade deal suspense, the European/German economy is also affected by lingering US-EU trade war tensions and Trump’s narrative on European auto tariffs.
On Friday, Trump said: “I would accept zero tariffs for certain European products, but not for cars and if European automakers would build their plants in the US, they will have no tariffs. Otherwise, the US will have to impose 25% tariffs on all European cars importing into the US”. On Wednesday, when Trump was asked about European auto tariffs, Trump replied: “There’s no recommendation, it’s up for review, but the EU has been as tough on the US as China regarding trade”.
As per source, a confidential report was prepared for the US President Trump that offered him the justification to impose tariffs on imported cars and trucks from the EU on national security grounds, should he choose to go that route. Such a move would be a major escalation in the trade war, as car tariffs would target US allies in Europe, particularly Germany. White House officials and many Congressional Republicans oppose the move. Trump has not made a decision as of yet.
As per reports, Iran was beating (cheating) Trump (the US) sanctions recently. Iran has sent several oil tankers to Asia using forged documents that indicated the oil was from Iraq.
Although Trump is “fighting” for lower oil prices for the interest of American consumers (voters), lower oil may not be necessarily good for the overall US economy.
Trump’s economic team argued for higher oil prices amid surging US production and export. The White House Council of Economic Advisers said in an annual economic report: “If the United States becomes an annual net exporter of petroleum, higher oil prices would, on average, help the US economy. In this case, the net gains for producers, and to their private partners that own mineral deposits, would outweigh the higher costs for (American) consumers”.
As a pointer, the US is now producing almost 12.1 mbpd, surged by around 2 mbpd from early 2018 and is currently the largest oil producer in the world, surpassing even Russia and Saudi Arabia. As a result of higher crude oil production, the US is now exporting around 3 mbpd, almost double from the last year, compensating some shortfall from the Venezuelan and Iranian supplies to some extent ( as the US supply is mainly of light sweet grade crude oil, while supplies from Venezuela/Iran are mainly of medium/heavy grade). As per IEA, the US could become a net crude oil exporter by 2021. This may be also positive for US twin deficits.
On Friday, Baker Hughes data show that active US oil rigs fell by nine in the past week to 824, at the lowest in 11-months, positive for oil.
On Wednesday, the EIA inventory report was positive for oil in all counts and a function of lower US import and higher exports. The US crude oil inventories plunged to -9.589 mb from prior -3.862 mb, lower than the expectations of inventory addition of +0.309 mb (API: -2.133 mb). The US oil imports dropped to -0.660 mb from prior addition of +0.002 mb. The US Cushing crude oil inventories at Okla dropped to -0.468 mb from prior -0.672 mb.
The EIA weekly distillate stocks (heating oil and diesel) slumped -4.127 mb from prior +0.383 mb, higher than the estimate of drawdown -1.094 mb. The US gasoline inventories dropped -4.587 mb from prior -4.624 mb, higher than the estimate of drawdown at -2.414 mb. The US refining capacity utilization rate jumped by +1.3% sequentially to 88.9%, higher than the estimate of a +0.2% increase.
After the EIA inventory report, oil broke $60 milestone for the 1st time in 4-months and made a high of 60.12 Wednesday, followed by 60.39 Thursday, but since then under stress on the concern of synchronized global contraction as a result of Trump trade war. The US-China trade skirmish is now only 8-months old and not a war in a true sense, but that’s already affecting the global Goldilocks expansion sentiment amid Chinses slowdown signs (as China sneezes, rest of the world catches a cold). China is too big to fall for the global economy.
On Monday, pre-US session, oil is currently trading around 58.73. slumped by another -0.53% and made a session low of 58.34 on lingering worries about a synchronized global contraction, outweighing oil supply disruptions (thanks to OPEC+ supply cuts and Iran/Venezuelan disruptions due to increasing US sanctions pressure). The OPEC+ is set to extend its production cuts till Dec’2019 or forever, while Saudi Arabia vowed for a balanced oil price around $70 in this war of Sheikhs and Shells.
Technical View: Crude Oil/WTI (May-19)
Technically, whatever may be the narrative, time and price action suggests oil now has to sustain above 57.80-58.25* for a further rally to 59.85/60.65*-61.75/62.15* and 62.95/63.25-64.30/65.75 in the near term (under bullish case scenario).
On the flip side, sustaining below 57.30, oil may again fall to 56.45/56.00-55.00/54.20* and 53.45/52.80- 52.20/51.15*-50.15/49.50 in the near term (under bear case scenario).