Crude Nosedives Again as Traders Resume Worrying About Poor Demand

Wednesday August 14, 2019

Schizophrenia once again defined crude trading on Wednesday, with disappointing economic data from China for the month of July rekindling fears of slowing global demand and causing Brent to lose 3 percent just 24 hours after the benchmark rose 4.7 percent, its biggest daily percentage gain since December.

All but forgotten was Tuesday's forward-thinking reason for optimism: that the latest wave of U.S. tariffs against China had been suspended and news that both countries would return to the bargaining table in two weeks to try and resolve their trade dispute.

Reports of a surprise drop in Chinese industrial output growth to a more than 17-year low in July caused Brent to drop by $1.82 to settle at $59.48 per barrel; West Texas Intermediate fell $1.87 to settle at $55.23 per barrel.

Phil Flynn, senior market analyst at Price Futures Group, remarked, "The data out of China, the potential recession brewing in Germany, all of that is playing into global demand worries.

"Today, we're back in fear mode."

Taking a rational approach to crude analysis, Matt Smith, director of commodity research at ClipperData, noted that deciding the status of oil demand isn't as easy as alarmists might think.

He pointed out that U.S. crude stocks grew by 1.6 million barrels last week, compared with analysts' expectations for a decrease of 2.8 million barrels, but "Countering this bearish [crude] build has been draws to both gasoline and distillates amid strong implied demand."

Gasoline stocks fell by 1.4 million barrels, compared with analysts' expectations in a Reuters poll for an increase of 25,000 barrels, as demand jumped to a record 9.93 million barrels per day (bpd).

The question of where crude prices should be is difficult to determine: on one hand Middle Eastern countries have repeatedly stated that prices above $70 would be of help to their economies, and higher prices would also presumably inspire exploration and development investment; but Reuters noted that "As soon as prices surge, U.S. president Donald Trump pops up, often on Twitter, to urge Saudi Arabia to lower prices" in order to give American motorists a break at the gas pump.

The news agency went on to state that "As a result, prices have been stuck between $60-$75 per barrel this year, despite financial market volatility and big oil supply outages, mainly driven by U.S. sanctions on Iran and Venezuela."

And by all counts, fear and uncertainty will continue to influence prices: "People are panicking," said Mark Waggoner, president of Excel Futures Inc. "They are saying 'I can't be long crude here if the economy is going to slow down.' "