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Oil Prices Tank On Global Recession Fears

Nick Cunningham

Oil prices continued to slide on Wednesday, falling on a string of worrying economic news.

Markets were peppered with troubling data from September at the start of the week, with each new release compounding fears that cracks in the global economy are growing.

Global manufacturing activity declined for the fifth consecutive month in September, the longest period of contraction since 2002. A few automakers posted double-digit percentage declines in car sales – Toyota said its year-on-year sales fell 16.5 percent; Nissan’s sales were down 17.6 percent; and Honda’s numbers were off by 14.1 percent.

On Tuesday, the IMF warned that the global economic slowdown could be sharper than it previously expected. “We see the global economy going through a gradual, synchronized slowdown,” the IMF’s First Deputy Managing Director David Lipton said in Berlin on Tuesday. “Unless the trade tensions are defused, it’s very hard to see mainstream macroeconomic tools countering the impact of escalating trade difficulties, so it’s very important that those be de-escalated.”

Meanwhile, the World Trade Organization slashed its trade growth forecast for this year to 1.2 percent, down substantially from 2.6 percent in April.

But the markets were particularly downbeat on news that U.S. manufacturing slumped badly in September, falling to 47.8 in the Institute for Supply Management factor index, the worst reading since June 2009. For much of this year, the U.S. economy continued to appear healthy even as a slowdown became visible in China and much of Europe.

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Weakening data for U.S. manufacturing, auto sales, global trade and economic growth – the data is all pointing in the same direction. “In addition to ISM yesterday, you had auto sales data. You had Honda, Toyota, Nissan with double-digit declines. Much worse than expected,” Willie Delwiche, investment strategist at Baird, told Bloomberg. “It raises enough questions about how resilient is the consumer at this point. We haven’t seen enough to say ‘Yeah, the consumer is folding,’ but questions are starting to intensify.”

“The economy is running on one engine, and that’s the consumer,” Stephen Gallagher, chief U.S. economist at Societe Generale SA, told Bloomberg. Last week, one measure of consumer confidence showed a steep drop in September, although the market is still waiting on more data on the consumer front.

If global economic growth forecasts have to be revised down again, as the IMF suggested was likely, that would spark another cut to oil demand forecasts, especially since the IEA bases its assumption off of the IMF figures. IEA executive director Fatih Birol admitted as much in an interview on Bloomberg TV. “Looking at the global economy weakening…China, the driver of global oil demand, experiencing the lowest economic growth since 30 years. The advanced economies are slowing down. We may well revise down our demand numbers in the next days or months to come,” Birol said.

The agency is sticking with its demand growth forecast of 1.1 million barrels per day (mb/d) for now, but at cut to that outlook seems all but inevitable.

During midday trading on Wednesday, WTI slid below $53 per barrel, and Brent was below $58. Both are close to two-month lows, and notably, prices are now quite a bit below where they were on the eve of the Abqaiq attacks.

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“Oil prices are finding it virtually impossible to break out of their defensive stance because weak US economic data are fueling renewed concerns about demand,” Commerzbank wrote in a note on Wednesday.

Stocks plunged as economic woes started to take center stage. The Dow was off by 500 points during midday trading. Some analysts said that the reaction was overblown. “The market might be getting a little ahead of itself,” said Sam Stovall, chief investment strategist at CFRA Research, according to CNBC. “We have to be reminded that manufacturing represents about 10% of our economy while services represents about 90%. The services side is strongly in expansionary mode.”

But the EIA didn’t help matters. On Wednesday, the agency reported a crude oil inventory build of 3.1 million barrels last week along with a lower-than-expected drawdown of gasoline stocks. Taken together, the data added to the growing body of evidence pointing to an economic slowdown. 

By Nick Cunningham of Oilprice.com

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