Crude Tumbles a Massive 5.7% on China Concerns

But one expert says the losses were simply due to too much inventory: File Image/Pixabay

Less than a day after one noted expert called China and its relations with the U.S. the most important  geopolitical issues facing crude by far, the latest developments in the trade war with those countries caused crude prices on Thursday to tumble by a massive 5.7 percent.

News on Thursday that companies were suspending business with Chinese telecom giant Huawei after it had been blacklisted by Washington caused West Texas Intermediate to settle $3.51 lower at $57.91 per barrel, tumbling 5.7 percent;  WTI is on track to end the week 7.7 percent lower and post the worst weekly performance in five months.

Brent sank $3.35, or 4.7 percent, to $67.64 per barrel,  on pace for its worst week since December.

John Kilduff, founding partner at Again Capital, observed that "The $60 level is a critical support point; after $60, really it's right down around $58 or so.....theoretically, if this thing really becomes a washout, $52 is the downside objective."

Stoking traders' concerns on Thursday was the disclosure that Japanese manufacturing activity fell into contraction in May, and manufacturing activity for the European Union and Germany was also below expectations.

More disturbing was the argument that weak crude demand is spreading from developed nations to emerging economies: that was the contention of Oxford Economics, which also stated in a research note that "We are currently forecasting 4 percent oil demand growth for this year [for China], but this assumes a significant acceleration in the remainder of 2019."

But Scott Nations, president of NationsShares, offered a different reason why crude prices tanked on Thursday: he told CBNC television that "There's way too much oil here in storage: that was the catalyst to get us going, and then oil is one of the most risk-on assets in the world, and nobody wants to own anything that's risk on, particularly if the trade tensions with China are going to stretch out over at least a month."

For his part, Ryan Lance, CEO of ConocoPhillips, suggested that oil investors should get accustomed to "a hell of a lot of volatility" because although global markets generally remain "well supplied," they are also "thinly balanced" between supply and demand.

He said, "If we see $80 we kind of tell people: Be prepared, you might see $40 or $50 on the back end; cycles are getting shorter, the peaks and troughs are getting significant."

Earlier this week,  Jason Schenker, president of Prestige Economics, told Bloomberg radio that by far the most important geopolitical issue for oil "is the trade piece....and the slowing growth in China," simply because China is the biggest net importer in the world of crude.