Oil Flirts with Bear Market

Oil Flirts with Bear Market
Oil extended declines as an increasingly aggressive U.S. trade policy fueled fears the world could be heading for a significant economic slowdown.

(Bloomberg) -- Oil extended declines -- and was close to bear-market territory -- as an increasingly aggressive U.S. trade policy fueled fears the world could be heading for a significant economic slowdown.

Futures in New York fell as much as 2.6% after slumping 5.5% Friday. China struck a combative tone in a white paper released Sunday, blaming the U.S. for the collapse in trade talks and saying it won’t be pressured into concessions. That came after the White House rattled markets Friday by announcing tariffs on Mexican goods and terminating India’s designation as a developing nation, stopping it from exporting products to the U.S. without duties.

Oil has now fallen almost 20% from a high in late April, wiping out about half of its rally in the earlier part of the year, mainly due to the increasingly fraught global trade environment. While a tense situation in the Middle East has been supporting prices somewhat, the White House indicated over the weekend that it would be willing to negotiate with Iran without preconditions. Meanwhile, whether Russia keeps cooperating with Saudi Arabia on production cuts is shaping up as an important price driver over the next few months.

"The oil market continues to trade with extremely high beta to risk as concerns over a global slowdown escalate,” said Stephen Innes, managing partner at SPI Asset Management. “The latest sell-off should be a stark reminder of just how fragile the oil markets balancing act is, and should be enough to bring Russia back into the supply agreement fold.”

West Texas Intermediate crude for July dropped 42 cents, or 0.8%, to $53.08 a barrel on the New York Mercantile Exchange at 7:25 a.m. in London after falling as much as $1.39 earlier. The contract is now down 19.9% from its closing high on April 23. If it finishes more than 20% lower than the April peak it will officially be in a bear market.

Brent for August settlement fell 79 cents, or 1.3%, to $61.20 a barrel on London’s ICE Futures Europe exchange. The July contract closed 3.6% lower at $64.49 before expiring on Friday. The global benchmark crude was trading at a premium of $8.02 to WTI.

There could be a recession in nine months if the U.S. imposes 25% tariffs on an additional $300 billion of Chinese exports and Beijing retaliates, according to Morgan Stanley. Investors may still be underestimating the risks to the global economy from the trade war, Chetan Ahya, chief economist, wrote in a note released Sunday.

“There’s an increased likelihood the U.S. slaps tariffs or implements measures to restrict trade against any countries it sees as engaging in unfair practices, such as China, Mexico and India,” said Takayuki Nogami, the chief economist at Japan Oil, Gas and Metals National Corp. in Tokyo. ”Even Japan could be a target.”

Russia’s average daily oil output fell below its OPEC+ target in May for the first time this year after buyers refused to take exports via Druzhba, the nation’s key pipeline to Europe, because of contamination. The country produced about 11.11 million barrels a day of oil last month, the lowest since June 2018.

--With assistance from James Thornhill.

To contact the reporter on this story:
Tsuyoshi Inajima in Tokyo at tinajima@bloomberg.net

To contact the editors responsible for this story:
Serene Cheong at scheong20@bloomberg.net
Andrew Janes


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