Complex Made Simple

Oil fuelling talks of a global recession and historical data seems to agree

Are we heading into a recession? Oil will tell

The intensification of US-led trade tensions in recent weeks have weighed negatively on the global growth outlook, adding to the downward pressure for oil prices The combination of rising gold prices and falling crude costs is alarming Gold-to-oil ratio surging, copper prices getting annihilated, corporate spreads widening, and credit markets screaming recession ahead

Oil is defying all expectations, falling at alarming rates, and precipitating fears of a recession described as being of equal or greater impact than those made in recent global crises.

Prices burning in flames

Oil traders are ignoring Saudi Arabia’s commitment to keep markets stable, said Han Tan, Global head of currency strategy & market research at FXTM. 

He said Brent futures’ year-to-date gains have been slashed with oil now trading around the $62/bbl handle.

“The intensification of US-led trade tensions in recent weeks have weighed negatively on the global growth outlook, adding to the downward pressure for oil prices. Market fears over the resilience of global demand for oil have overshadowed the commitment by Saudi Energy Minister to “do what is needed” to rebalance the markets,” Tan explained. 

“Even if OPEC+ producers decide later this month to extend its supply cuts programme through the second half of 2019, that may not be enough to significantly offset the downward momentum for oil, as long as heightened trade tensions persist and continue snuffing out any exuberance over the global economic expansion.”

Oil and Gold don’t mix 

Oil prices are hovering around bear-market levels amid concerns over slowing global growth and the potential for tariffs to sap energy demand, said MarketWatch.

Gold meanwhile has been heading in the other direction, with similar factors that are keeping pressures on oil have led gold to a five-session winning streak that’s propped up prices to levels not seen in more than a year.

This combination of rising gold and falling crude is alarming.

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Three other times in history precious metals surged while oil plunged! All of them happened during severe bear markets and recessions.

Global growth concerns

Always volatile, oil prices have tumbled more than 20% since late April because of growing fears that demand is weaker than expected as the global economy slows, according to the New York Times (NYT).

 It said investors are also worried that President Trump’s trade war with China and his threat to put tariffs on imports from Mexico could depress growth even more.

On Wednesday, crude oil futures in the United States closed at $51.68 a barrel, down 3.4% for the day.

Here are the prices at the time of writing, courtesy of Oilprice.com:

“The outlook for oil prices was much different just six weeks ago, when the Trump administration was tightening sanctions on two leading producers, Iran and Venezuela, and civil war was breaking out around Libya’s capital. Some analysts speculated that there wouldn’t be enough oil to go around and that prices could jump to $90 a barrel or even higher. Not now,” said NYT.

Signals of a gloomy global economy are plenty.

“Gold-to-oil ratio surging, copper prices getting annihilated, corporate spreads widening, and credit markets screaming recession ahead,” he said. “The Fed’s utterly dovish comments just add to this list. Rate-cuts when late in the business cycle have never been a bullish sign. It reaffirms the many bearish macro signals we have been pointing out. Economic conditions are weakening in the face of asset bubbles everywhere.” According to asset management firm Crescat Capital.

Also, demand is weaker than expected. US fuel inventories are rising.

Crude oil price trended lower after the Energy Information Administration reported a weekly build in crude oil inventories, at a sizeable 6.8 million barrels. This compares with a draw of 4 million barrels for the previous week, according to an OilPrice.com report.

At 483.3 million barrels, the EIA said, crude oil inventories were some 5% above the seasonal average.

“Many analysts said the fall in oil prices was at least partly driven by short-term factors. Investors had been buying oil future contracts for several months, expecting higher prices. Those traders began reversing those bets in early May when it appeared that the United States and China were not as close to a trade deal as many people had assumed, added NYT.

“A more pessimistic view of the economy followed, including fears that the manufacturing industry in the United States was struggling and that China was growing more slowly than expected.”