Oil barrels and bags of plastic beads sit stacked inside the polyethylene plant of the Ecopetrol SA refinery in Barrancabermeja, Santander, Colombia. (Photographer: Nicolo Filippo Rosso/Bloomberg)

Oil's Double Slump Shows Market Roiled by Week of Bearish News

(Bloomberg) -- The oil market just performed a screeching U-turn.

Since the middle of last week, Brent crude had two of its largest single-day dollar declines in years. The cause of the rout: expanding supplies from nations where there had been major outages -- such as Libya -- at a time of mounting concerns about demand as a trade war between the U.S. and China escalates. As if that weren’t enough, signals from the physical cargo-trading market are suddenly looking weaker too.

“The demand side is a backdrop of discomfort and concern for the oil market and this is emphasized in the escalating trade war,” said Bjarne Schieldrop, chief commodities analyst at SEB AB. “Then you get these messages like Libya being back and that’s when you get the tick down in prices.”

Oil's Double Slump Shows Market Roiled by Week of Bearish News

It’s a stark contrast to little more than seven days ago, when the market was fixated with the lack of spare output capacity as key producers in the Organization of Petroleum Exporting Countries ramp up oil output. Here’s a look at the major drivers of the $7-a-barrel, or 9 percent, retreat over the past week in oil futures.

Physical Slump

Suddenly, oil tankers lifting North Sea crude are stopping en route to China and there are even signs that some barrels might be stored at sea. Neither of those things suggest strong demand.

Oil's Double Slump Shows Market Roiled by Week of Bearish News

Timespreads on the Brent benchmark, a measure for traders monitoring supply and demand, have plunged since last week. The second to third month spread is now trading at its weakest level since September. In addition, Urals crude is trading at its lowest in more than two months.

“The perception in the oil market seems to be shifting,” says Carsten Menke, commodity analyst at Julius Baer. “Fears of shortages, which pushed prices as high as $80 a barrel in early summer, are receding and concerns about looming surpluses growing.”

Outages Ending

A major dispute between rival oil companies in Libya was ended hastily last week, adding several hundred thousand barrels a day of supply to the market. On top of that, other shorter-term outages also abated, with production in Nigeria and Canada both steadily coming back online.

As those barrels return, U.S. President Donald Trump is also said to be mulling a release of the U.S. Strategic Petroleum Reserve to combat higher U.S. gasoline prices, although no decision has been taken yet. The International Energy Agency said in its monthly report last week that it’s in a close dialogue with major producers and consumers to advise on any market support that may be needed.

“It’s the supply side of the equation that is having a great influence on oil prices,” said Tamas Varga, analyst at PVM Oil Associates. “It’s the SPR story that sent the market lower yesterday, everything else was in the market already.”

Demand Slowdown

It isn’t just supply though. Oil consumption appears to be struggling under the twin strains of high prices and the trade clash between China and the U.S. Global demand growth had already been going through a soft patch in the second quarter and faces a “significant slowdown” in the third, according to the International Energy Agency, the Paris-based institution which advises most major economies.

Oil's Double Slump Shows Market Roiled by Week of Bearish News

“The big risk the markets now face is the potentially faster-than-anticipated slowdown in demand on the back of higher prices from the first half of 2018, and trade war-led slowdown in global growth,” said Abhishek Deshpande, an analyst at JPMorgan Securities LLC in New York.

The highest prices in three years are taking their toll in some emerging economies that phased out fuel subsidies when oil was cheaper. Protests have erupted in Brazil and Russia, while India has warned that purchases will suffer.

The latest data from China, the world’s second-biggest oil consumer, only underscores the vulnerability. China’s economic expansion in the second quarter was the weakest since 2016, while key readings on investment growth and industrial output slowed in June.

Trade Troubles

The weaker backdrop would only deteriorate further if the trade conflict between the U.S. and China deepens. Although the immediate hit to demand will be “limited,” that could change if the tariff battle stalls the global economy, roils financial markets or curbs the need for freight fuels, according to Goldman Sachs Group Inc.

“The sell-off is still a trade-related sell-off,” Ed Morse, head of commodities research at Citigroup Inc., said in a Bloomberg television interview.

©2018 Bloomberg L.P.