Bear Market Catches up to Oil as Global Recession Fears Continue

The price of crude oil recently plunged into a decline as trade tensions continue. The drop in the price of this valuable resource came despite the current increasing demand for oil. Commodities trading suffered a major blow last week following this latest development and the escalation of trade tensions between the US and China are definitely not helping matters.

US Crude Stockpiles Send Oil Price Crashing

The crude oil Futures dropped to a seven month low on Wednesday, August 7, after it lost 5.8% of its value within a day. The decline came after the American crude stockpiles surged, much to the surprise of the market. The drop in futures saw the oil price plunge into a bear market as the extra supply negatively affects the price of this commodity. In addition to this, the continued fear of global recession amid trade tensions between the US and China added to investors’ worries that demand for the resource could decline soon. The US West Texas Intermediate crude futures (WTI) price dropped to $50.52 a barrel on the 7th of August but currently, a week later, this commodity trades just above the $54 a barrel mark. 

Last month, the United States cut interest rates for the first time in years, sparking fears of a looming global recession. The concerns were heightened last week when New Zealand, India, and Thailand followed the path of the US and reduced interest rates. Following these announcements, the global stocks and commodity markets recorded losses as investors pushed their funds into safe-haven assets. Gold, bonds, and a few other safe-haven assets, such as Treasury bills, rallied following the decline in stock prices. Bitcoin also recorded a significant surge in price, surpassing the $12,000 for the second time this year, as some investors turned to cryptocurrencies to protect their funds. 

With no end in sight to the current trade tensions and with the American crude stockpile rising, the global stock markets could further experience losses as fear of a global recession remains. Thus, it is highly likely that the prices of safe haven assets, like gold and Bitcoin, could rally further.

US Domestic Crude Inventories End a Seven-week Loss

According to a Bloomberg report last week, the US domestic crude inventories ended its seven-week long stretch of declines after it surged by 2.39 million barrels in a week. The increase in oil inventories led the Futures to rise by 2.4% in after-hours trading on August 6, but the surge was short-lived as it crashed by 5.8% a few hours later. 

The gasoline stockpile also went up by 4.4 million barrels. This came as a surprise to industry experts as there is not usually extra gasoline in the current season due to the high demand for the resource around the globe. 

The Brent crude October futures plunged by 5.2% on Wednesday, August 7, with the price dropping to $55.88 a barrel. It currently stands at $58.50 (August 15). The decline last week saw oil prices lose more than 20% of their value since the 2019 peak recorded in April 2019. 

US- China Trade Tensions

August hasn’t been a favorable month for the crude oil price as trade tensions between the United States and China continue to heighten. The US-China trade war eclipsed the fear that a cut in the supply of crude oil from the Persian Gulf would have the most significant, negative impact on the price of the resource. 

The trade war could further affect the oil industry in the coming months. Bloomberg reported that there are speculations that the Chinese government will not patronize American oil as the trade war escalates. The United States is set to impose a tariff on $300 billion worth of Chinese goods starting on the 1st of September, as President Donald Trump aims to gain a competitive trade advantage over China. Beijing is also threatening to stop purchasing agricultural products from the United States. 

The trade war, which has affected trade, technology, and recently, the foreign exchange market, is now affecting the oil industry as well. The big question is just how far will this trade war go before its negative impact is recognized and both sides start positive negotiations?

 

 

Disclaimer: This content does not necessarily represent the views of IWB.

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