Crude Prices Defy Logic and Rise on Strength of Weakening Demand

Friday August 9, 2019

Friday's crude trading behaviour set a new standard for unpredictability in a sector renowned for being loopy to begin with: news from the International Energy Agency that oil demand growth was the lowest since the 2008 financial crisis caused prices not to plunge further, but to actually rise by over $1.

On the strength of IEA data showing that demand to May from January grew at its slowest since 2008, hurt by mounting signs of an economic slowdown and intensification of the U.S.-China trade war, Brent gained $1.15, or 2 percent, to settle at $58.53 per barrel; West Texas Intermediate rose $1.96, or 3.7 percent, to settle at $54.50 per barrel.

Giovanni Staunovo, analyst for UBS, tried to rationalize what motivated traders by stating, "The demand growth cut was already announced previously by the head of the IEA, and the agency still expects larger inventory draws for 2H19."

Prices were also supported by Euroilstock data showing total crude and product inventories of 16 European nations in July were slightly lower than in June.

But despite crude's surprising gains on Friday, the commodity lost over 5 percent (for Brent) and 2 percent (for WTI) for the week.

For the record, the IEA in its latest monthly report lowered its global demand growth forecasts for 2019 and 2020 to 1.1 million and 1.3 million barrels per day (bpd), respectively, and it cited China as the only major source of growth at 500,000 bpd for the first half of this year.

The report stated, "The outlook is fragile with a greater likelihood of a downward revision than an upward one."

Now that the analytical community (whose predictions are routinely proven wrong) has decided that reconciliation between the U.S. and China is slim, they have turned their attention to what they think will be the next source of tension between the two countries: namely, that China will dramatically reduce its intake of U.S. crude imports over the coming weeks.

Stephen Brennock, oil analyst at PVM Oil Associates, told CNBC, "I think it is a virtual shoo-in that volumes will slow to a trickle and may even grind to a complete halt."

Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies, remarked that if Washington moves ahead with new tariffs in September, Beijing will  probably impose charges on most, if not all, of its U.S. imports, including oil.