Trade War Again Causes Crude Price Losses as Investors Flee The Energy Sector

Not even declining U.S. inventories can mitigate the negative sentiment: File Image/Pixabay

Although U.S. president Donald Trump on Tuesday dismissed the idea that the trade war with China would be protracted, his assurance was hardly enough to prevent continued worries about the economic consequences of the conflict, and crude prices as a result took another hit.

Brent, whose price has declined by over 9 percent in the past week, fell 87 cents to $58.94 per barrel, while West Texas Intermediate declined $1.06 to $53.63 per barrel.

Presumably, the losses on Tuesday were mitigated somewhat by a Reuters poll showing that U.S. crude oil inventories were expected to have fallen for an eighth consecutive week (early word from the American Petroleum Institute is that inventories fell by 3.43 million barrels last week).

However, sentiment overall on Tuesday was dictated by little more than the U.S. and China taking mild potshots at each other, with Washington accusing Beijing of being a currency manipulator, and Beijing accusing Washington of causing financial market chaos.

Carsten Fritsch, analyst at Commerzbank, summarized the thinking of traders by stating in a note, "As far as the oil market is concerned, there are two key questions: Why should China carry on buying U.S. crude oil?, and Why should China continue to adhere to the U.S. sanctions when it comes to buying Iranian oil?"

Regardless of the motivation of crude traders, the energy sector overall is being viewed by an increasing number of analyst as "no-touch": Gina Sanchez, CEO of Chantico Global, told CNBC television that "The fundamentals look just as bad as the technicals: you have growing stockpiles, growing inventories possibly meeting waning demand, and that is just a recipe for disaster."

Sanchez added that a strengthening U.S. dollar against a weakening foreign-exchange environment could also negative affect crude prices.

Brian Sullivan, anchor at CNBC's Worldwide Exchange, agreed, noting that "No group has been beaten up as much as oil and gas stocks this year: if you just look at one of the biggest ETFs, the XOP, it's at its lowest level since early 2016, when crude prices were below where they are now."

Sullivan said that when the dollar impact on oil, oversupply concerns, and global slowdown fears are taken into account, prices could drop to $45 per barrel, which "would be more pain for the already-slammed oil stocks.

"Investors can't run away from the oil and gas stocks fast enough."