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Oil Prices Drop As Bearish Risk Soars

Nick Cunningham

Oil prices fell back even more mid-week as Saudi Arabia says it’s ahead of schedule to make the necessary repairs to the Abqaiq facility. The easing of concerns surrounding the world’s largest oil supply outage allowed traders to shift their sights back to the deteriorating economy.

“Market participants are no longer focusing on the risks to supply now that Saudi Arabia has raised the prospect of its oil production being rapidly restored,” Commerzbank said in a note on Wednesday. “Instead, concerns about demand have gained the upper hand again.”

President Trump did his best to beat down oil prices further this week. He spoke to the UN General Assembly on Tuesday, where he laid into China over its trade practices, souring hopes of a breakthrough in the trade war when the two countries resume negotiations next month.

Trump also made some scathing remarks about Iran, but notably, left a small door open for a path to de-escalation. “America knows that while anyone can make war, only the most courageous can choose peace,” Trump said.

Iranian President Hassan Rouhani gave an interview to Fox News, a move likely aimed at speaking directly to Trump.

While an easing of sanctions remains highly unlikely, a dialing down of tensions is bearish for crude. “The geopolitical risk premium has all but vanished and bullish catalysts suddenly appear in short in supply across the oil market,” PVM analyst Stephen Brennock told Reuters.

The return of Abqaiq, the lack of retaliation on Iran (thus far), Trump’s harsh comments on China – it all adds up to a slide in oil prices.

More importantly, the worrying economic signs continue. Manufacturing has been slumping worldwide. Just this week, Germany posted some of the most worrying numbers yet, an indication that the German economy is on the edge of recession. Manufacturing activity has also slowed sharply in the U.S., but up until now the American consumer has kept the economy humming along.

However, there are signs that consumer sentiment is finally beginning to sour. Consumer confidence plunged by the most in nine months in September, according to the Conference Board, falling to a reading of 125.1, down from 134.2 in August. “We are clearly seeing a [U.S.] economy that’s slowing. How far it slows is the big question right now,” Joe Song, senior economist at Bank of America Merrill Lynch, told the Wall Street Journal.

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An economic slowdown has also hit India, particularly in the nation’s auto industry. The deceleration in India alone could shave off 100,000 bpd of global oil demand. Car sales in India plunged by 27 percent for the three-month period between June and August compared to a year earlier, the largest contraction in 16 years, according to Reuters.

Trade volumes are going “from bad to worse,” according to ING Bank.

Finally, to cap off the bearish sentiment for oil, the EIA reported a surprise uptick in crude oil inventories for the week ending on September 20, which is all the more notable after the Abqaiq outage. Oil sank on the news.

Still, despite Trump’s harsh language for Beijing, both the U.S. and China are under pressure to make a deal. Both sides have also made some positive gestures in recent weeks, delaying tariffs on select items. China is preparing to purchase more pork from the U.S., a move that will both meet domestic shortages but also buy some goodwill with Washington. The American and Chinese leadership would not be making such moves if they weren’t convinced that at least a minor breakthrough in the trade talks was possible.

One other minor bullish factor could be China scrambling to buy up oil cargoes following the Abqaiq outage. “We believe that China will likely speed up the pace of its strategic oil reserves build out, lending support to oil demand in 2020,” Bank of America Merrill Lynch said in a note.

In fact, the Abqaiq attack could affect the trade talks. “Oil is China's Achilles heel and the US is the only country capable of securing Beijing's oil supply chain in the short run. This factor could entice China to make additional concessions on trade,” Bank of America said. “Needless to say, a full resolution or even a temporary agreement on US-China trade would be a very bullish factor for all cyclical assets, including oil.”

Trump said on Wednesday that a trade deal with China could happen sooner than you think, a statement that should be taken with a grain of salt, but arguably offers a window into his thinking.

Much of that is speculation, however. In the meantime, rising inventories, weak demand and a souring economy are at the top of oil traders’ minds.

“Barring a repeat attack on Saudi infra-structure, oil will weaken further,” BNP Paribas Harry Tchilinguirian told the Reuters Global Oil Forum.

By Nick Cunningham of Oilprice.com

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