Lower demand for higher-risk assets and worries that an escalation of the trade dispute between the United States and China will lead to a global economic slowdown and lower demand for crude oil is weighing on U.S. West Texas Intermediate and international-Brent futures prices shortly before the regular session opening.
The price action indicates that traders have become less-concerned about the OPEC-led supply cuts and the U.S. sanctions against Iran and Venezuela and have become more concerned about the Sino-U.S. trade dispute causing a global economic downturn and lower demand.
We’re already seeing signs of lower demand from the emerging market countries. With the U.S. Dollar increasing in value, dollar-denominated crude oil is becoming more expensive. This is helping limit demand from these countries, putting pressure on crude oil prices.
A major drop in demand is just speculation right now since data from the U.S. Energy Information Administration (EIA) is still showing global oil demand is likely averaging over 100 million barrels per day (bpd) this year for the first time. Bearish traders will be looking at future EIA data to see if this information is still valid. Prices could plunge further if the next round of EIA data shows this figure dropping.
Demand is the focus at this time because U.S.-China trade relations are making the headlines. Nonetheless, supply risks continue to remain at elevated levels with continued geopolitical uncertainty in the Middle East, as well as Venezuela’s well-known turmoil.
Furthermore, OPEC and its allies including Russia are scheduled to meet in late June or early July to discuss whether its strategy to trim production will continue into perhaps the rest of the year. Russian First Deputy Prime Minister Anton Siluanov said on Wednesday that the country would consider a possible extension of its oil output reduction agreement.
The OPEC-led supply cuts are likely to continue to provide support for crude oil prices, but they may not be strong enough to stop the price decline if demand plunges. This is because Saudi Arabia and its allies, especially Russia are not likely to drop production in an effort to meet the decline in demand. If this occurs then price could hit the mid-$40 level.
This article was originally posted on FX Empire
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