Another Sign of Economic Worry: Tumbling Oil Prices

A couple of months ago, the bulls ran the oil markets. Now the bears have taken over.

Always volatile, oil prices have tumbled more than 20 percent since late April because of growing fears that demand is weaker than expected as the global economy slows. 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 percent for the day, even as the stock market closed higher.

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.

“Everybody is surprised and now doubting projections of global demand growth,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service. “It’s not as though there has been a rapprochement with Iran. It’s not as though there has been an increase in the rig count in the United States or Canada.”

The decline of crude oil prices is just one of the many signals that markets have sent in recent weeks darkening the outlook for the global economy. Prices for other industrial commodities such as copper, nickel and steel have declined. Stock markets in countries highly dependent on global trade, such as South Korea, Japan, Germany and Taiwan, have also fallen.

The same economic fears that have driven down yields on Treasury notes and bonds appear to be driving down the price of oil.

“It is an indicator,” said Neil Bradley, chief policy officer for the U.S. Chamber of Commerce. “As we assess the economy’s vulnerabilities, this is one of the things we’re looking at.”

The latest sign that demand is weaker than expected came on Wednesday when a government report showed that fuel inventories in the United States were rising. Supplies are usually tight in early June as the summer driving season gets underway.

Supplies of crude oil were up by nearly seven million barrels for the week, the highest level in two years.

The American oil benchmark has swung up and down over the last year. The price now is nearly the same as it was three years earlier, when prices first recovered from a sharp drop to below $30 a barrel in 2014 and 2015.

In recent days, many analysts had predicted that oil prices would soon rebound, just as they had after they tumbled late last year when the Trump administration made it easier for countries like Japan and India to continue buying oil from Iran without running afoul of American sanctions.

The Trump administration has recently said it will become stricter about enforcing sanctions against Iran and do more to curb Venezuelan oil exports, too. That, along with violence in Libya and the decision by many oil companies to cut their 2019 exploration budgets, led analysts to conclude that oil prices would move up.

But the opposite has happened.

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.

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.

An oil price rebound, of course, is still possible, especially if the administration reaches trade deals with China and Mexico or if tensions between Iran and its neighbors and the United States lead to fresh violence.

Yet falling oil and gasoline prices, especially at a time of year when they typically go up, could act as an economic stimulus of sorts.

The average price for regular gasoline nationwide on Wednesday was $2.80 a gallon, nine cents lower than a month ago. It was $2.94 this time last year. Mr. Kloza predicted that the price could drop below $2.50 in the coming weeks, helping consumers — particularly lower-income households that have older, less efficient cars.

However lower oil and gasoline prices would hurt petroleum-producing states like Texas, Oklahoma and Louisiana. Nevertheless, most oil companies can still make money at current prices.

Oil companies have enjoyed better prices for much of this year than they expected and are generally well positioned because they are spending less, said Raoul LeBlanc, executive director for energy at IHS Markit. But the industry could struggle if prices fall much below $50 a barrel.

“Fifty-buck oil is not a great place — it’s survival,” Mr. LeBlanc said. “But if it goes below $45, it’s unsustainable, and the companies will not be able to spend the money to even maintain production.”

Source link