Crude futures went down on Wednesday after the S&P 500 and Nasdaq hit two- month lows along with the 10- Year Treasury yield falling to a 20- month low on concerns of further fallout to the global economy from the U.S.-China trade war. The CBOE Volatility Index proven to be a gauge of the fear factor in markets, hit a two-week high.
West Texas Inyermediate fututes the benchmark for U.S. crude, settled down 33 cents, or 0.6%, at $58.81 per barrel. It had fallen more than $1, or 3%, earlier in the day, striking an 11-week low at $56.90.
The August contract for UK- traded Brent futures, the global gauge for oil, was off 87 cents, or 1.3%, at $67.80 a barrel by 3:11 PM ET (19:11 GMT). It fell to $66.67 earlier in the day, its lowest since the week of March 24. The July contract was at $69.38 a barrel, down 1%.
Two months ago, WTI hit 2019 highs of $66.28 while Brent scaled this year’s peak of $75.60 on fears of a supply squeeze after President Donald Trump ended sanction waivers on Iranian oil exports while doubling down on the embargo on Venezuelan crude amid deep production cuts by OPEC.
But after gaining nearly 40% for the year through April, crude futures reversed course as the escalating trade war brought fear of a global recession that could severely curb oil demand.
Few now talk about OPEC production cuts that just weeks ago were a major price driver after the cartel’s dominant partner Saudi Arabia and top ally Russia ruled out raising oil output in the second half of the year. Even flooding in the U.S. Midwest this week that could put a further squeeze on summer crude needed by refiners did not seem to bother traders much.
In the place of tight supply is talk about Beijing preparing to limit the export of rare earth elements in its attempt to strike back at the U.S., a move that would escalate the conflict. The rare earth elements include a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment.
Adding to the trade war fears are worries about a more conciliatory tone toward Iran adopted by Trump this week. The Iran factor has basically provided the geopolitical premium for oil this year, along with sanctions on Venezuela.
For May, WTI is headed for a loss of nearly 11% and Brent 8%, though the U.S. benchmark remains up 26% on the year and its U.K. peer is 25% higher on the year.
Wednesday’s selloff came ahead of the American Petroleum Institute’s routine snapshot at 4:30 PM ET on what crude oil inventory numbers could be in data due from the Energy Information Administration on Thursday.
The market is expecting the EIA to report a 900,000-barrel drop in crude stockpiles for the week ended May 24, the last week before the May 27 Memorial Day holiday that usually sees heavy gasoline demand kicking off the peak U.S. summer driving season. In two prior weeks, crude inventories had unexpectedly jumped by around 5 million barrels, adding to the pressure on oil prices.
Some said the latest slump was also due to WTI contracts tripping below bearish markers like the 200-day moving average, resulting in selling that begets more sellling.
“I think the markets being below the 200-day MA has resulted in more selling from the CTA side,” said Scott Shelton, referring to the hedge funds classified as Commodity Trading Advisors. “They often sell for a few weeks once the trends change, which generates weaker markets on weak macro while bullish information is ignored.”