Oil is poised for a drop of 20 percent since early June, meeting the definition of a bear market. While excess crude production is abating, inventories around the world are brimming, especially for gasoline, and a revival in U.S. drilling threatens to swell supplies further. As the output disruptions that cleared some of the surplus earlier this year begin to be resolved, crude could again slump toward $30 a barrel, Morgan Stanley predicts. “The tables are turning on the bulls, who were prematurely constructive on oil prices on the basis the re-balancing of the oil market was a done deal,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. “It’s probably going to take a little longer than they expected.” Oil almost doubled in New York between February and June as big names from Goldman and the International Energy Agency to new Saudi Energy Minister Khalid Al-Falih said declining U.S. oil production and disruptions from Nigeria to Canada were finally ending years of oversupply. Prices are set for their biggest monthly loss in a year amid a growing recognition the surplus will take time to clear.
Crude oil prices fell alongside shares and the US Dollar on Friday while gold prices edged up, rebounding from a two-week low. The news-wires chalked up the move to a disappointing US GDP report that showed the annualized growth rate slipped to 1.9 percent in the fourth quarter. This undershot forecasts calling for a print at 2.2 percent and marked a significant slowdown from the 3.5 percent recorded in the three months through September.
In fact, the move started well before the data crossed the wires, although it does seem to have amplified momentum. The typically cycle-sensitive WTI and Brent crude oil benchmarks followed European stocks downward and US Treasury bonds – the standby safe haven asset market-wide – dutifully advanced, pressuring yields lower. That this did not prove to be supportive for the greenback, another go-to beneficiary of risk aversion, may hint that traders see eroding sentiment as roadblock for Fed rate hikes.
The risk-off dynamic carried over into Asian trade as the new week began. S&P 500 index futures are pointing decidedly lower as Europe comes online, pointing to more of the same ahead. On the data front, the Fed’s favored PCE inflation gauge takes top billing, with an uptick to 1.7 percent expected. While that might have been supportive for rate hike bets under normal circumstances, lingering uncertainty about on-coming fiscal policy may leave investors unconvinced.
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