Causes and Implications of Recent Fluctuations in oil prices

Saudi Aramco slashes fuel prices substantially
Saudi Aramco slashes fuel prices substantially

Oil markets failed to maintain the bullish trend seemed evident since the beginning of this year, and weak prospects for global growth may continue to put pressure on prices amid the ongoing trade dispute between the United States and China, the world's largest consumers of crude oil.

Oil markets and global equities are falling as Europe heads to the pollsamid new economic gloom, in the wake of the renewed trade war between China andthe United States, and the delay of the Brexit deal.

"Markets are trapped in a full storm of political turmoil in the UK, tradewars between the United States, China, and European economic fragility,"said Connor Campbell, Financial Analyst at Spreadex.

UnstableTrends

US oil futures closed higher onFriday, replacing some of the previous day's losses as they settled at theirlowest level in more than two months. However, prices recorded their worstweekly drop so far.

Traders continue to measure the riskof slowing energy demand as to the continuation of the United States and Chinatrade dispute. WTI crude oil rose by 1.83% to $58.87 a barrel to settle at$58.97 a barrel on the New York Mercantile Exchange (NYMEX). After a 5.7% dropon Thursday, while monthly contract prices lost 6.8% for the week.

In contrast, the WTI and Brent crudeoil rallied on the worst daily and weekly declines in six months as oil andequity markets were hit hard on Thursday by rising tension in the US-Chinatrade war, raising investor concern about the state of the global economy. Aday after the Energy Information Administration announced an increase in UScrude inventories.

Oil prices hit their strongest weeklydrop this year amid growing concern that the US-China trade frictions willescalate, threatening global demand for crude oil, as US inventories unexpectedlyreached their highest level since July 2017, rising supplies amid theuncertainty of the markets.

WTI fell below $60 a barrel for thefirst time since the end of March, while Brent crude fell below $70 a barrel forthe first time since early April.

US crude oil, which hit $61 onThursday, suffered its worst day since the Christmas Eve crash on Wall Street,falling nearly 6% to $57.91 a barrel, down 13% since closing at $66.30 a barrela month ago.

Analysts blamed the sharp sell-off;Ryan Fitzmaurice, energy strategist at Rabobank, said: "Oil inventories areaccumulating with fears of a global economic slowdown and the market is now atrisk."

The decline below the next supportlevel for WTI expected at $56, is likely to be accompanied with a furtherdecline in stocks, which will be largely tied to unresolved trade issuesbetween the United States and China.

Whyprices have fallen?

"Last Thursday was a risky day withglobal stock markets falling," said Marshall Steves, an energy marketanalyst at Informa Economics, pointing out that the uncertainty about tradenegotiations has a negative impact on financial markets of all kinds, includingequities, and certainly oil futures.

Market participants said rising tradetensions between the world's biggest economies, the United States, and China,raised doubts about the desire to buy crude oil in the near term if the tariffdispute remained unresolved for a long time. Commodity investors fear tarifftensions could intensify the global economic slowdown, which seems to bealready possible in Europe.

US stocks, the Dow Jones industrialaverage (DJI) fell by1.11% and the Standard & Poor's SPX500 fell sharply by1.19% on Thursday, while shares in Europe and Asia also fell.

"If the trade war is not resolved or anypromising progress achieved, oil prices will remain low," said JamesHatzigiannis, senior commodities associate at Long Leaf Trading Group, who alsopointed that If there are no further supply disruptions in the Middle East, WTIcan certainly fall as US stocks rise above the five-year average.

On the supply side, oil prices havefallen since Wednesday, after the US Energy Information Administration reportedthat US crude oil supply rose by 4.7 million barrels for the week ending on May17, recording the second consecutive weekly rise, and raised the possibility ofcreating another abundance in Oil markets, such as those that caused the fallof crude oil in the falling market late last year.

Inventories in Cushing, Oklahoma, the US crude futures delivery center, hit their highest level since December 2017, government data showed.

Trade War Developments   

Oil prices, which rose on Friday afterfalling on Thursday, were in line with other parts of the stock markets afterthe US Department of Commerce put Huawei Technologies, the world's largestsmartphone maker, on the so-called black list.

US President Donald Trump saidThursday that US complaints against Huawei could be solved in a US-China tradedeal. Trump also described China's telecom giant as "very dangerous."

US officials have already imposedtrade restrictions that effectively prevent US companies from dealing withHuawei, the world's largest maker of telecommunications network equipment, amidfurther concerns about national security.

Also on Thursday, spokesman for theChinese Ministry of Commerce, Gao Feng, called for a fair trade environmentafter new sanctions were imposed on 10 Chinese companies, urging the UnitedStates to change its policies, and the CNBC report quoted Feng as saying earlyon Thursday: "The US campaign is not only causing serious damage to normaltrade cooperation between the two countries, but also poses a major threat tothe security of the global industry and the industrial supply chain."

After weeks of fruitless negotiationsand more reprisals imposed by the world's two largest economies, China saidtalks on resolving the trade dispute could not be resumed until the UnitedStates tackled its "wrongdoing".

"If The United States wanted to continue negotiation, it must, sincerely, control its misconduct." a spokesman for the Chinese Ministry of Commerce said.

"President Trump seems to have concluded that maintaining a tough stance against China is better than reaching a quick and narrow deal," wrote Louis Alexander, chief economist at Nomura in a note to clients, adding: "There is a "high risk" tariff that will remain in effect until the end of 2020. Even before the imposition of the new tariff, the current tariffs have already reduced global economic growth.

Growth risks    

The Organization for EconomicCo-operation and Development (OECD) said last week that global economicgrowth had stabilized but remained weak after a "drop" in the rate of increasein trade in goods and services, underscoring the dispute between the UnitedStates and China as one of the biggest risks to the global economy.

 The Organization, which expects global growthof 3.2% in 2019, the second lowest since 2012 and of 3.4% for the next year, pointedout in its economic forecast that the growth of trade in the first quarter wasthe weakest – and barely remained in the positive zone since the first threemonths of 2016.

Although earnings and economic data sofar this year have not been as bad as expected, analysts expect the worst tohappen. The decline in manufacturing growth in the United States on May, whichshowed the weakest pace of growth in almost a decade, increased public concernin the markets, leading to the DJI fell about 400 points on Thursday.

The IHS Markit data released onThursday showed that business activity "slowed sharply" in May due to trade warfears. US business activity fell to the three-year lowest level and new ordersfor manufacturing fell for the first time since August 2009.

The energy market could be furtherpressured if the trade war continues to escalate. In a report published Monday,the chief economist of Morgan Stanley, Chetan Ahia, warned that "the global economyis heading for recession" if the United States imposed a 25 percent tariff onall imports America of China.

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