Crude markets dive amid global economic concerns
The gloomy global economic outlook and banking fears are taking their toll on crude markets, leading to a significant dip.
West Texas Intermediate (WTI) experienced three consecutive weeks of plunging prices, briefly reaching its lowest level since late 2021. Last week, the Brent benchmark saw a decline of approximately 5.3 per cent, while WTI fell 7.1 per cent despite a slight rebound on Friday.
Bearish sentiment pervaded crude markets due to concerns over global economic health, recurring fears of a recession, renewed banking anxieties in the U.S., and an unexpected contraction in China’s manufacturing activities.
Investors are growing increasingly nervous about the macro outlook and its impact on oil demand, according to analysts from ING.
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“The recent developments have delivered a double blow to oil prices,” also remarked Jun Rong Yeap, a market strategist at IG. “Renewed U.S. banking fallout has prompted fears of wider contagion and amplified recession talks, while a surprise contraction in China’s manufacturing activities has pushed back against the optimism surrounding the oil demand outlook.”
Recessionary trends in U.S. manufacturing and freight transport have played a significant role in the decline of crude prices, according to Reuters columnist John Kemp. He pointed out that these sectors have experienced a six-month decline, resulting in lower diesel and electricity consumption.
China’s factory activity also unexpectedly contracted in April, with falling orders and weak domestic demand negatively impacting the country’s manufacturing sector, according to a private survey reported by Reuters. The Caixin/S&P Global manufacturing purchasing managers’ index (PMI) fell to 49.5 in April from 50.0 in March, indicating a contraction rather than growth.
The prospect of a meltdown in the U.S. regional banking sector further dampened crude markets after PacWest Bancorp announced its intention to explore strategic options, including a potential sale or capital raise. PacWest Bancorp’s announcement triggered concerns of a broader financial and banking crisis, resulting in a decline in shares of regional lenders. These developments indicate that fears of a banking meltdown persist, despite JP Morgan’s takeover of the First Republic Bank.
These factors underline that the genuine concern about oil demand in one of the largest consumers and producers extends beyond market jitters. Global oil demand is slipping, which poses a real cause for concern in crude markets.
Michael Tran, managing director of Global Energy Strategy at RBC Capital Markets, attributes this trend to weaker demand as people spend less on travel. “There’s certainly demand-side weakness that’s playing out in the market,” he said. “We’re in for a bit of a soft patch here,” He believes that a significant shock to the markets will be necessary to break free from the current oil rout, as cautious investors remain on the sidelines.
“Demand really needs to lead us out of this mess, but until then, I think the market is going to be quite sloppy,” Tran emphasized.
Oil prices have fallen 14 per cent this year, despite OPEC (Organization of Petroleum Exporting Countries) and its allies’ decision in April to cut production. The recent market plunge suggests that OPEC’s plan to regain control of the markets through production cuts may not be yielding the desired results.
Are we in for another OPEC+ output cut announcement? Although, at this point, OPEC sources seem to contradict any such possibility, it cannot be ruled out entirely.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.
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