Oil has entered a bear market as fears of an financial downturn mount. The fundamentals look a lot tighter than the swoon would possibly counsel, however the provide and demand image can also be starting to look extra unfavourable.
The EIA report was exceptionally weak, displaying a robust construct in crude oil (+6.8 million barrels), gasoline (+3.2 million barrels) and distillates (+4.6 million barrels). The mixed builds throughout a number of merchandise stunned the market. Sometimes, these figures form of offset one another. For occasion, if refiners are working actually arduous, they have an inclination to construct up gasoline shares, however they deplete crude oil within the course of, so crude inventories dip whilst gasoline shares rise. This time round there was none of that. Increases throughout the board led to a plunge in oil costs.
“Oil has a Lehman Brothers moment,” is how Standard Chartered described it. The funding financial institution places out its personal “bull-bear index,” starting from -100 to +100, measuring the course the market appears to be heading in a given week.
“Our US oil data bull-bear index registers -96.7, only slightly better than the extreme -100 reading of two weeks ago,” the financial institution mentioned. “The four-week average of the index is -79.4, taking it far below the five-year range.” There hasn’t been such a unfavourable four-week run since 2008, the financial institution mentioned. In different phrases, oil market fundamentals are heading in a extremely bearish course, and the final time issues regarded this unhealthy was throughout the monetary disaster.
The flip aspect is that the US financial system will not be spiraling uncontrolled in the best way that it was after the collapse of Lehman Brothers. So, it’s attainable that oil costs “have overshot to the downside,” Standard Chartered famous. “We think oil prices are now around USD 10 per barrel (bbl) too low on a fundamental basis, unless a specific data point is believed to be a leading indicator rather than a temporary blip,” Standard Chartered analysts mentioned in a separate report on Tuesday.
Still, demand is beginning to weaken. Standard Chartered notes that weak point is usually confined to distillates (i.e., weaker exercise in manufacturing and agriculture), with consumption in May dropping 9 %, year-on-year. While gasoline demand has held up, it’s nonetheless off 1.7 % from a yr in the past.
A Wall Street Journal survey of 10 funding banks finds a median Brent forecast of $70 per barrel for the yr. Brent is now within the low-$60s, so main analysts are largely shrugging off the present tailspin and imagine that crude will rebound. They are trying previous the opportunity of an financial downturn and as a substitute are specializing in tightening provide situations on account of declines in Venezuela, Iran, probably Libya and momentary outages from Russia. “I’m still happy with our forecasts,” Warren Patterson, senior commodities strategist at ING, informed the WSJ. “The selloff we’ve seen has been purely pushed by macroeconomic and commerce considerations, and if we take a look at the basic image, we see oil provide persevering with to tighten.”
But it isn’t as if financial considerations don’t have any impact on the basics. Obviously, an financial downturn would undercut demand, resulting in a provide/demand mismatch. The pending US tariffs on Mexico, ought to they go ahead, would nearly actually deepen the gloom. Bank of America Merrill Lynch admitted as a lot. “Fears of an escalating trade war, particularly following last Thursday evening news regarding new US tariffs on Mexico, have shattered confidence. Manufacturing PMIs could deteriorate further in the months ahead, derailing our $70/bbl average oil price projection for 2019,” the financial institution mentioned.