Oil is nearing its biggest weekly loss this year as demand and trade-war woes combine in a 'recipe for disaster'

  • After falling more than 5% on Thursday, oil is poised to register its biggest weekly loss this year.
  • Rising American crude inventories, weak demand from refineries, and US-China trade war fears are a “recipe for disaster in oil markets,” one analyst said.
  • Disappointing US manufacturing data have also fuelled concerns of weaker global demand for oil.
  • Watch oil trade live.

Oil prices slumped more than 5% on Thursday, leaving them poised to record their biggest weekly fall this year. The decline reflects a cocktail of factors including disappointing American manufacturing data, rising US shale production, softer demand from refineries, and concerns about the US-China trade war’s impact on global economic demand.

“The dangerous combination of surging US crude inventories, weak demand from refineries and rising concerns over US-China trade tensions impacting economic health is creating a recipe for disaster in oil markets,” said Lukman Otunuga, research analyst at FXTM.

An IHS Markit survey of US manufacturers recorded a score of 50.6, a nine-and-a-half year low. The research firm’s reading from its survey of services companies also slumped to a 39-month low of 50.8, fanning fears of a broad economic slowdown in the US that could temper demand for oil.

“Prior to this week, supply concerns had dominated oil prices whilst demand took a back seat,” said Jasper Lawler, head of research at London Capital Group. “This dynamic is now changing, and the price of oil has adjusted accordingly.”

“Without a resolution to the ongoing trade dispute quickly, which now looks very unlikely, oil could struggle to push higher,” Lawler said. “We expect rallies in oil to be short lived,” he added, referring to a recovery in crude prices on Friday morning.

The US shale revolution means domestic oil production is forecast to rise 16% to around 1.1 million to 1.2 million barrels per day, according to Rystad Energy. Weak refinery output lifted US crude inventories last week to their highest levels since July 2017, according to data from the Energy Information Administration cited by Reuters.

Meanwhile, the US-China trade war shows no signs of ending as the Trump administration prepares to expand tariffs to virtually all Chinese imports and China intends to hike tariffs on $US60 billion of US imports starting in June. A full-blown trade war could reduce US GDP by 0.5% over three years, according to Goldman Sachs research published this week.

Oil rallied earlier this month on concerns of tightening supply after Trump “decided to pick a fight with the Republic of Iran,” said Naeem Aslam, chief market analyst at TF Global Markets. Sanctions on Venezuela and disruptions to oil production from Russia to Nigeria also lifted prices, he added. OPEC’s commitment to maintain supply cuts has also provided support.

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