Oil slumps to worst weekly loss of year as trade fears linger

Drill pipe sits on a rack near a Nabors Industries Ltd. rig drilling for Chevron Corp. in the Permian Basin near Midland, Texas, US. (Bloomberg pic)

NEW YORK: Oil limped to its worst weekly loss of the year as tensions lingered over how the trade feud between the world’s top economic superpowers will hit demand.

Futures in New York rebounded somewhat on Friday but still ended the week down 6.6%, the biggest decline since late December, after days of escalating rhetoric between China and the US Chinese envoy Cui Tiankai said the Asian nation was committed to striking a deal on Friday but said it’s ready to apply countermeasures to American sanctions.

“These worries over the trade situation with China is becoming more pronounced here,” said John Kilduff, a partner at Again Capital LLC. “It really strikes at the heart of the demand side of the equation of crude oil and the fallout is across the Asian region.”

Oil plunged 5.7% in New York on Thursday as investors fled riskier assets following the White House’s blacklisting of Huawei Technologies Co. and several Chinese surveillance companies, moves that have been met with defiance by Beijing.

Prices retook some of that ground on Friday, joining a bounce-back rally for equities. A report showing US crude explorers cut drilling activity last week may have eased concern over growing oil supplies, said Ashley Petersen, an oil analyst at Stratas Advisors LLC in New York.

West Texas Intermediate crude for July delivery rose 72 cents to US$58.63 a barrel on the New York Mercantile Exchange Friday.

Brent for July settlement was up 93 cents to US$68.69 a barrel on the London-based ICE Futures Europe exchange. The global oil benchmark finished the week down 4.9%, its worst performance since Dec. 21.

The moves come ahead of the US Memorial Day long weekend, which many market participants consider the start of summer driving season.

“There’s no doubt that concerns about the US-China trade situation are still around. And there is some negativity in the market. But with that said, it’s driving season and that means you get an overwhelming spike in demand in the US and everywhere else,” said Bob Yawger, director of futures at Mizuho Securities USA. “It looks like there could be some upside.”

While many macro investors and generalists watch outright oil prices move higher or lower, specialised oil traders tend to monitor term structure, or, the spread between contract months as an indication of supply and demand. Even with oil prices plunging this week, those spreads have remained resilient. Nevertheless, the premium for July versus September jumped on Thursday – by 18% to US$2.20 a barrel – suggesting traders remain nervous about the scarcity of supply short-term supply.

Anxiety over the trade war is taking precedence over a supply backdrop riddled with risks including a tense Middle East, a steadily deteriorating situation in Venezuela and production disruptions from Russia to Nigeria. The drop in oil prices may give the Organization of Petroleum Exporting Countries and its allies more incentive to extend their production cuts beyond June.