Oil Down 16% in May, Most in 6 Months as Trade Wars Hit Hard

© Reuters.

By Barani Krishnan

Investing.com - It's macro in, micro out, as oil markets head for their worst monthly loss in six months amid trade wars that force investors to focus on a potential recession rather than the specifics of energy supply and demand.

West Texas Intermediate, the benchmark for U.S. crude, and U.K. Brent, the global gauge for oil, posted double-digit losses for May after Mexico became President Donald Trump's latest target for tariffs for allegedly not doing enough to prevent illegal migration into the U.S.

WTI settled Friday's trade down $3.09, or 5.5%, at $53.50 per barrel.

Brent lost $2.40, or 3.6%, for the session to settle at $64.47. The August Brent contract finished at $61.99, down 5.1%.

For the month, U.S. crude fell 16% while its U.K. peer lost 11%. Both benchmarks are still 18% and 20% higher, respectively, on the year.

But most importantly, in Friday's trade WTI broke below the $55 per barrel level the first time since February, setting a 13-week low of $54.73. Brent had crashed under $65 for a 16-week low of $63.05.

On a more crucial technical level, both benchmarks broke below all key moving-day averages in the past week, including the lowest 5-day moving average. By dollar value alone, oil has lost about $11 on a barrel from a $22 gain accumulated since the Christmas Eve lows of last year, its bottom during the 2018 selloff. That's a loss of exactly 50%, coming despite continued production cuts by OPEC.

OPEC-led production cuts, U.S. sanctions on Iran and Venezuela, along with disruptions in Nigeria or Russia all contributed to a 40% rally in the first four months of the year. But since May began, oil prices turned direction amid trade wars waged by the Trump administration.

On Thursday, the administration imposed a 5% tariff on all imported goods from Mexico beginning June 10 and said it has plans to “gradually increase” that tax to 25% until the flow of undocumented immigrants across the border stops. Trump later tweeted that stopping the flow of illegal drugs may also be a condition, while having companies move production to the U.S. to avoid tariffs was also part of the surprise plan.

The tax on Mexican imports could disrupt a long-standing cross-border energy trade, hitting U.S. refiners that use Mexican oil by boosting prices and raising concerns about potential retaliation by the world's biggest buyer of U.S. energy products, Reuters reported.

Mexico sends 600,000 to 700,000 barrels of oil to the United States every day, mostly to refiners that process that crude into gasoline, diesel and other products. Mexico buys more than 1 million bpd of U.S. crude and fuel, more than any other country, and analysts are concerned that retaliatory tariffs from Mexico could disrupt that trade.

The biggest trade war waged by the U.S. is, of course, with China with the more-than year-long showdown already threatening to push the world into a recession as neither side has shown signs of blinking. Besides the showdowns with China and Mexico, the Trump administration has also removed India – another giant economy with more than 1 billion consumers – from the U.S. Generalized System of Preferences, which gives favorable access to goods from developing countries.

“'Screwed by Macro' may deserve a place on my headstone as prices are cratering due to 'trade fears'," ICAP (LON:NXGN) energy futures broker Scott Shelton lamented in a note on Friday after he called on investors just a day earlier to go long on oil in anticipation of strong crude draw numbers in the U.S. Energy Information Administration's weekly report released Thursday.

The EIA said in its regular weekly report that crude oil inventories decreased by just 0.28 million barrels in the week to May 24, compared to a forecast draw of 0.86 million barrels. In two previous weeks, it announced back-to-back builds of around 5 million barrels.

Oil bulls typically count on strong refinery runs and heavy gasoline consumption in the run-up to the summer. But refiners have been slow to draw down crude as profit margins for producing gasoline were running about 30% below year-ago levels.

Some suspect that one reason for Trump's escalation of trade battles around the world was to rein in high oil prices after OPEC's refusal to raise production lately.

"Most interestingly, he hasn’t sent out a single tweet about oil for weeks now while carrying out all these, so you can’t even accuse him of intentionally suppressing the market," John Kilduff, founding partner at New York energy hedge fund Again Capital, said. "Oil bulls have no choice but to grit their teeth and see how far he goes.”