Oil Prices Stumble on Fears of Falling Demand

Date: June 12, 2019
Source: Wall Street Journal
Oil prices dropped sharply today as investors signaled their worries over sagging demand and a burgeoning U.S. supply glut.
 
Brent crude, the global benchmark, was down 2.7 percent at $60.61 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures fell 3 percent to $51.70 a barrel.
 
The U.S. Energy Information Administration lowered its monthly oil demand forecast on June 11 to 1.2 million barrels a day, a 15 percent cut from the prior month’s forecast, playing into concerns about global economic growth.
 
Those concerns have been partly driven by the trade conflict between the U.S. and China -- and fears about its impact on oil demand -- and have stung commodities and equities markets in recent months. Brent crude has sold off 14 percent in the past month, while WTI futures are down 16 percent.
 
Weakening economic figures out of China have prompted its government to issue waves of stimulus measures, with the latest coming this week. Still, oil markets have shrugged off Beijing’s attempts to support the economy.
 
“I’m puzzled the stimulus measures didn’t cause the usual positive and it’s that growth pessimism that continues to pressure oil,” said Norbert Rücker, head of commodities research at Julius Baer.
 
Sagging demand has prompted unseasonable builds in inventories. The American Petroleum Institute reported On June 11 that U.S. crude supplies climbed by roughly 4.9 million barrels for the week ended June 7, according to sources.
 
Today’s price drop was partly “a reaction to those pretty bearish numbers from the API,” said Warren Patterson, commodities strategist at ING. “The market was expecting a million barrel drawdown but instead got a more-than-four-million-barrel build.”
 
While steep declines have calmed in recent sessions, today’s drop brought oil prices back to the bottom of their recent price range.
 
After June 11’s API figures, the U.S. Energy Information Administration’s weekly inventory report, due today, will be closely watched. Supply data have been bearish in recent weeks, prompting swings in oil prices and confusion among traders.
 
“Knowing this market, I wouldn’t be surprised to see the [Energy Department] data come out bullish,” said Edward Marshall, commodities trader at Global Risk Management.
 
A larger-than-expected build in EIA inventories would likely accelerate oil’s selloff, though.
 
“It’s just noise at the moment, but if Brent broke down toward $57 a barrel it would be significant,” Marshall added.
 
Oil prices could receive a further jolt in the coming weeks, with signals out of major producing nations increasingly divergent ahead of a summit between the Organization of the Petroleum Exporting Countries and its allies in Vienna due at the end of June.
 
Comments from Saudi officials this week have suggested participants were close to agreeing an extension to the continuing OPEC+ production cuts, but remarks from individuals in the Russian oil market have contradicted that.
 
With question marks hanging over the date of the conference, “when they do have the meeting, we could see some pretty tough negotiations,” said ING’s Patterson.
 
“A scenario when they don’t extend cuts is not going to be pretty,” he added.
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