(29 May 2019) This year had been looking promising for oil as it enjoyed a bit of a bull-run, following on from the sell-off at the end of last year.That was until April when the price took a turn for the worse and a bearish correction took hold. This led to a big decline last week; featuring the worst day for oil in six months.As always, there are many factors that contribute to the price movements in oil, including macroeconomic and political variables. At the moment, it seems a lot of the recent big moves in price have been down to geopolitical risks.
The US-China Trade War
Enter the US-China trade war. The US and China are the two largest importers of oil in the world. Between the two countries, they collectively purchase over 30% of the world’s oil.This means, as far as the oil market’s concerned, when their economic outlooks are negative or there is some uncertainty, this is going to affect demand and therefore be factored into the price of oil.The trade war between these two nations is also having a direct effect on their perceived buying power, which is making investors nervous. This leads to investors wanting to take risk off the table and therefore move out of oil.
These bearish moves in oil prices have also been in line with a sell-off in equities. US Stocks have fallen by over 5% within the last month.Concerns about the trade war are also leading to a lack of investment, which is harming growth. The U.S. manufacturing growth figure for May showed the weakest pace of growth in almost a decade. An economic slowdown isn’t a good sign for oil, hence the reaction in price.
Production and Inventory Levels
In addition to these factors, when we look at oil we always have to look at supply as well. Inventory data releases showed that stockpiles have been increasing more than the market expected, although they’re estimated to show a decline in the next release.Increasing inventories is usually a bearish sign as it means there isn’t the demand for oil at the current price.However, there are some bullish points to consider that could counter these bearish factors. Including ongoing cuts in production from OPEC, which would cap the supply and, more importantly, the rising tension between the US and Iran.
US and Iran Tension
Historically any tension between the US and Middle Eastern countries has caused oil prices to rise. However, thanks to the current slower global economy and trade war concerns, this issue is only acting as a counterweight on prices at the moment with the potential to really escalate quickly.So that’s a brief explainer on the situation with oil. As you can imagine, each of these points is a complex issue that deserves more than a brief paragraph.There are also other factors that haven’t been mentioned. However, the aim of this explainer is to allow you to get up to speed so you can follow along and understand any stories in the financial press and potentially spot some opportunities!