Last week’s crude price slide of over 7% was the worst price drop since December 2018. Indicators suggest it’s not over. A combination of factors have hit and will continue to hit global oil prices for at least another week. Primary on that list of factors are the typical pressures of a “business cycle.” But other factors are weighing heavily on global oil markets.
Those typical and predictable pressures deal with supply and demand. Currently, global supply is outpacing demand and will continue to do so through the summer. But as the supply differential has been fairly thin, crude prices have been rather stable since the beginning of 2019. But the “unpredicted” supply build of 8.6 million barrels in U.S. crude oil stocks reported by API (American Petroleum Institute) last Wednesday (May 22nd) rocked investors ease in that thin margin.
Concerns are now that supply may begin to expand its outpacing of demand through the rest of 2019. Previous global demand estimates for 2019 were 101.36 million barrels per day. Supply estimates were just a few hundred thousand above at 101.11mmBdp. Revised estimates will depend on a variety of reports coming out this week.
The additional drivers that have weakened crude’s price position, and were not part of the landscape of the predictable, is the U.S. trade war with China that heated up recently. As goes the Dow Jones Industrial Average, so goes (often) oil prices. The Dow has shed 919 points since talks with China broke down May 6th. That breakdown resulted in the addition of 25% tariffs on another $250 billion worth of Chinese imports. That effectively taxed nearly every single product China sells to the United States at levels of 10% to 25% above typical tariffs. China is expected to respond by adding to its list of $50 billion worth of U.S. imports they taxed in their initial response to U.S. tariffs.
From October 2018 to March 2019, U.S. exports to China have dropped by 26%. That includes a drop of 78% of the $6.5 billion worth of fossil fuel commodities exported during the same period a year before (Oct. 2018 to March 2019, $1.4 billion). Those include crude oil, propane, and liquified natural gas. In the middle of 2018, China was taking 20% of all U.S. crude oil exports. Taking into account that during the same time period imports from China have only dropped by 5%, it appears that the trade war, at present, is not going well. (all data reported by the Washington Post, May 16, 2019).
Coming this Week
Over supply and a trade war are converging on a variety of market reports due out this week that have the industry on edge. Any negatives in any one of these reports could drive crude prices further toward the $50 mark (WTI). Those include Gross Domestic Product reports due out this week from the United States and Canada. Inflation data is due to be reported as well for the U.S. and Germany. Germany will also report on its job numbers. Equally concerning is China’s PMI index (Purchasing Managers Index) report which is also coming this week. That report is a monthly survey of China’s entire supply chain demand health.