2019-12-16 12:38:481970-01-01 00:00:00

Oil Plunges

The wrath of the US-China trade war is becoming increasingly felt within the global markets with oil prices plummeting 5.7% on Thursday (23 May). Prices dropped to $57.91 a barrel flowing from the increased tariffs on $200 billion worth of Chinese products. Tariffs act as a direct imposition to economic demand, and that’s exactly what has happened. With the trade war not tipped to end any time soon, oil prices and therefore global economic activity is set to continue on the downward trend. Observantly, weak crude demand is spreading from developed nations to those that are still developing.  

What gives?

Just like the global bulletin being flooded with constant news regarding the US-China trade wars, it’s evident now that crude oil supplies are following suit. Demand for the commodity is suffering and causing a potential glut, with US crude stockpiles increasing by 4.7 million barrels last week. These figures upended analyst predictions, reaching its highest figures since July 2017. Consumption in the US of gasoline and diesel fell by 2.7% compared to last year according to the Energy Information Administration. The globally recognised index Brent has curtailed accordingly by 4.6% to $67.76 a barrel.

As a result of slipping demand, prices have seen the biggest percentage loss since December 24. Contributing to this trend is the contraction of the US manufacturing sector. The US manufacturing PMI has dropped to record lows since September 2009 according to IHS markit, sitting at 50.6. The strong underperformance is highlighted by previous predictions being set at 52.5. Globally, manufacturing has suffered with the likes of Japan, China and the European Union recording losses. Most of these losses are attributed to the growing tensions between the US and Chinese governments.

Conditions in the economic battlefield between USA and China are worsening and aren’t showing any signs of improving. The Trump administration’s world known stance to ‘Make America great again’ is having devastating flow on effects to the rest of the economy. The trade dispute entered a new chapter after the blacklisting of the Chinese telecom giant Huawei. On top of this, both governments are set to increase tariffs of each other’s goods, which would spark greater economic downturn and weaker demand for oil. Conversely, the Trump administration has reduced sanctions on Iranian oil exports that were originally put in place to prevent oil price spikes and at the same time driving Iran’s crude exports to zero stated by Secretary of State Mike Pompeo.

What else is suffering?

Controversially, dropping oil prices usually have both positive and negative effects. However, with the severity of the drop, panic stations are setting in as founding partner of energy hedge fund Again Capital, John Kilduff, stated “the $60 level is a critical support point.” Kilduff further explains, After $60, really its right down around $58 or so. Theoretically, if this thing really becomes a washout, $52 is the downside objective,” pushing the idea that this drop isn’t an overnight spectacle, and drops might continue over the coming months.

As a result of falling oil prices, US economic activity has dropped with the NASDAQ Composite & Dow Jones dropping 122.56 and 286.14 points respectively. This economic hardship was similarly experienced in 2017 when oil prices dropped substantially resulting in firms in the North Sea, Arctic and other high-cost areas being rendered as no longer economic. This forced firms to cut back on production and lay off workers. Following these trends, banks and investment firms that have funded oil companies now are at risk of losing returns eventuating to an economic downturn.

What’s going to give?

The consensus is that global conditions will continue down this trend. Oil output has been consistently dropping with figures in December showing drops of up to 751,000 barrels per day. This is further exemplified by the production cut pact between the Organisation of Petroleum in Exporting Countries (OPEC) and its allies. ConocoPhillips CEO Ryan Lance expects “a hell of a lot of volatility” due to oil markets remaining “well supplied” but “thinly balanced” between supply and demand. Lance also told the Association of International Petroleum Negotiators, “Cycles are getting shorter, the peaks and troughs are getting significant.”

Conclusively, the volatility of crude oil prices has adverse effects on the rest of the economy. As prices dropped well above the norm, this offset the positive implications that usually come into effect; reduced petrol prices, reduced costs etc. In this case, the drop in prices is so severe that the rest of the economy as well as oil producers were hit harder than they could cope with.

By Nicholas Psaltis

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