Oil drops as trade war concerns outweigh supply disruptions

Thursday, 30 May 2019 00:00 - - {{hitsCtrl.values.hits}}

Oil facilities are seen on Lake Maracaibo in Cabimas, Venezuela – Reuters

SINGAPORE (Reuters): Oil prices fell on Wednesday on concerns the Sino-US trade war could trigger a global economic downturn, but relatively tight supply amid OPEC output cuts and political tensions in the Middle East offered some support.

Front-month Brent crude futures, the international benchmark for oil prices, were at $69.60 a barrel at 0332 GMT, down 51 cents, or 0.7%, from the last session’s close.

US West Texas Intermediate (WTI) crude futures were at $58.50 per barrel, down 64 cents, or 1.1%, from their last settlement.

“Crude oil was weak ... primarily as the bears on demand are winning compared to the bulls on supply,” James Mick, managing director and energy portfolio manager with US investment firm Tortoise, said in an investor podcast.

“Investors are concerned from a macro perspective about worldwide demand, particularly in the face of the growing trade dispute between the US and China,” he said.

Fawad Razaqzada, analyst at futures brokerage Forex.com, said another concern was that “falls in emerging market currencies (are) making dollar-priced crude oil dearer to purchase in those nations” and that crude prices could fall back.

Despite the economic concerns, global oil demand is so far holding up well, likely averaging over 100 million barrels per day (bpd) this year for the first time, according to data from the US Energy Information Administration (EIA).

But analysts are concerned that tightening credit amid the economic slowdown will hamper trading in commodities.

“We remain cautious regarding the short-term macroeconomic environment,” commodity brokerage Marex Spectron said in a note.

“Credit availability on the physical commodity markets is of particular concern.”

Eastport, a Singapore-based tanker brokerage, had similar concerns.

“An increase in caution and risk aversion could weigh on economic growth,” it said in a note on Wednesday.

Despite these concerns dragging on oil markets, crude prices remain relatively tight.

“Supply risks remain at elevated levels with continued geopolitical uncertainty in the Middle East, as well as Venezuela’s well-known struggles,” said Tortoise’s Mick.

Adding to this are ongoing supply cuts led by the Organization of the Petroleum Exporting Countries (OPEC) since the start of the year to prop up the market.

OPEC and some allies including Russia are due to meet in late June or early July to discuss output policy going forward.