Oil Teeters on Edge of Bear Market as Recession Warnings Spread

Investors may still be underestimating the risks to the global economy from the trade war, Chetan Ahya, chief economist.

04 Jun 2019, 07:35 AM IST

Oil Teeters on Edge of Bear Market as Recession Warnings Spread

Petroleum gas drips from the nozzle of a fuel pump hose at a gas station, operated by Tatneft PJSC, in Kazan, Tatarstan, Russia. (Photographer: Andrey Rudakov/Bloomberg)

(Bloomberg) -- Oil edged closer to a bear market collapse as Wall Street banks raised the specter of a recession, while Saudi Arabia tried to assure investors that OPEC will avert a supply glut.

Futures closed down 0.5% on Monday, a fourth straight daily decline that put crude within pennies of a 20% drop from late April. Saudi Energy Minister Khalid Al-Falih said Monday that recent volatility is “unwarranted" and predicted allied crude producers will continue efforts to avoid an oversupply for the rest of 2019.

Al-Falih’s assurances weren’t enough to calm traders worried that simmering trade disputes will squelch the economic growth that underpins oil demand. Escalating geopolitical tensions across the Middle East that imperil supplies haven’t been sufficient to offset concerns about weakening fuel consumption among the world’s biggest economies.

Morgan Stanley and JPMorgan Chase & Co. both warned of a recession if President Donald Trump follows through on threats to impose 25% tariffs against Mexico, on top of his escalating standoff with China. Bank of America and Citigroup, meanwhile, lowered their U.S. corporate profit forecasts while highlighting the risk of a downturn.

“What’s been very difficult is that supply has been falling very quickly, but then again, so has demand,” Francisco Blanch, global head of commodities research at Bank of America Merrill Lynch, said in a Bloomberg TV interview.

West Texas Intermediate crude fell 25 cents to $53.25 a barrel on the New York Mercantile Exchange, after shifting between gains and losses throughout the day. Futures have fallen 19.7% since they peaked on April 23; a settlement at or below $53.04 would have achieved the 20% decline that defines a bear market.

Brent for August settlement slipped 71 cents to $61.28 on London’s ICE Futures Europe exchange. The global benchmark crude was trading at a premium of $7.90 to WTI for the same month.

Investors have gotten “very rattled” by the trade disputes, Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said on Bloomberg TV. The bank recently downgraded the energy equities sector.

“We just can’t step in front of these demand concerns,” Calvasina said. “I don’t think energy investors give the energy sector enough credit when oil goes up but they certainly beat it to death when oil goes down.”

“I would like to reiterate my confidence, based on my discussions with several key producers, and on our track record, that we will do what is needed to sustain market stability beyond June,” Al-Falih said in an interview with state-run Saudi Press Agency. “We have previously stated our commitment to do whatever it takes to stabilize markets and we have delivered on those promises. And I am making that commitment again.”

Other oil-market news:
Gasoline futures slid 1.7% to $1.7413 a gallon. Saudi Arabia ramped up oil production last month by the most this year, largely filling the gap created by tougher U.S. sanctions on Iran, according to a Bloomberg survey. Russia’s average daily oil output fell below its OPEC+ target in May for the first time this year after buyers refused to take exports via Druzhba, the nation’s key pipeline to Europe, because of contamination. Hedge funds increased short-selling on Brent crude prices by the most in more than a year in the week ended May 28.

Other oil-market news:

Gasoline futures slid 1.7% to $1.7413 a gallon.
Saudi Arabia ramped up oil production last month by the most this year, largely filling the gap created by tougher U.S. sanctions on Iran, according to a Bloomberg survey.
Russia’s average daily oil output fell below its OPEC+ target in May for the first time this year after buyers refused to take exports via Druzhba, the nation’s key pipeline to Europe, because of contamination.
Hedge funds increased short-selling on Brent crude prices by the most in more than a year in the week ended May 28.

--With assistance from James Thornhill, Tsuyoshi Inajima, Alix Steel and David Westin.

To contact the reporters on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net;Grant Smith in London at gsmith52@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Catherine Traywick, Mike Jeffers