By Amrith Ramkumar and Ira Iosebashvili
Oil prices have remained soft this month despite rising
geopolitical tensions and threats of supply disruptions, the latest
sign that investors fear trade friction will hit global growth and
sap demand for crude.
Crude jumped after the U.S. blamed Iran for attacks on two
tankers in the Gulf of Oman last week, but struggled to hold those
gains despite fears of a broader military confrontation in the
Persian Gulf and the potential for trade disruptions in the Strait
of Hormuz. More than one-third of the world's seaborne crude oil is
shipped through the strait.
The muted response echoes a broader downdraft in prices for a
broad range of commodities that have come under increasing pressure
since trade talks between the U.S. and China broke down late last
month. Besides being the world's second-largest economy, China is
also a top consumer of many raw materials, from nickel to
cotton.
An additional factor has been a surge in U.S. stockpiles to
multiyear highs, driven by weak refinery demand and a
shale-production boom that has helped bring prices down from
triple-digit levels last seen five years ago. Higher output has
made prices less responsive to disruptions in bottleneck areas such
as the Gulf of Oman, analysts said, keeping the focus on a slowdown
in consumption.
"What's surprising is how the demand sentiment has changed over
the last few weeks," said Andy Lipow, president of consulting firm
Lipow Oil Associates. "We're seeing slowing of growth at the same
time that the market focuses in on record amounts of shale
production."
Brent crude, the global price benchmark, posted its third weekly
drop in four weeks even after the tanker attacks. Brent is 17%
below its April peak and down about the same amount in the past
year. U.S. crude oil is in a bear market, down more than 20% since
late April.
U.S. prices are at $52.51 a barrel and near levels critical to
drive profitability for some energy producers amid rising
stockpiles. Inventories, which typically fall at this time of year
as demand rises around the summer travel season, have climbed to
their highest level since July 2017, Energy Information
Administration data show.
"The reason oil prices are going down is because there's plenty
of oil, and that's also true with a lot of commodities," said Tim
Rudderow, who manages $1.5 billion at Mount Lucas Management LP.
"There's not a shortage of anything."
The S&P 500 energy sector is down 20% in the past year,
compared with a nearly 4% gain for the broader index. Large energy
companies, including Exxon Mobil Corp. and Chevron Corp., generally
reported underwhelming first-quarter results, hurt by weaker prices
and geopolitical issues that crimped profit from their refining
businesses.
Brent crude is at $62.01, increasing focus on a coming meeting
of the Organization of the Petroleum Exporting Countries and its
allies because many OPEC nations need higher prices to sustain
their economies. OPEC and partners including Russia are curbing
output through the end of this month.
Meanwhile, prices for copper -- a key component in global
manufacturing and construction -- are near their lows of the year,
also hurt by rising stockpiles. Coffee stands near its lowest level
in more than a decade, pressured by a wave of supply from Brazil.
Trade tensions are also weighing on prices for cotton, which have
fallen about 9% this year.
Some analysts expect further OPEC production cuts and continuing
supply uncertainty to lead to an oil-price rebound, helping
materials prices broadly stabilize. Because of recent U.S.-Iran
tensions, violence in Libya and U.S. sanctions on Venezuela, global
oil-supply disruptions are now at the highest levels in almost
three decades, Bank of America Merrill Lynch analysts estimate.
But in other signs of softer consumption, both the EIA and
International Energy Agency lowered their estimates for 2019 global
oil-demand growth last week. The World Bank earlier this month cut
its global-growth forecast to 2.6% from 2.9% in January -- and
lowered its forecast for growth in trade.
Figures Friday showed that Chinese industrial production grew at
the slowest pace since 1992 last month, while growth in fixed-asset
investment also slowed from April.
"Everyone is just obsessed with demand," said Leigh Goehring,
managing partner of natural-resources investing firm Goehring &
Rozencwajg Associates.
While hopes that the Federal Reserve will lower interest rates
have kept stock prices near record levels, analysts say fears of
excess supply and negative momentum indicators continue to keep
commodities under pressure.
Commodities assets under management by active funds, including
commodity trading advisers, or CTAs, fell nearly $15 billion last
month to roughly $80 billion, Citigroup Inc. analysts estimate.
That figure is down from a January 2018 peak of $184 billion. CTAs
are largely made up of trend followers.
Supply-and-demand-focused hedge funds and banks have also scaled
back commodity trading in recent years, leaving fewer traditional
players to stabilize prices. The increased impact of trend
followers on commodities markets means prices are more susceptible
to quick shifts in sentiment, investors say.
Global revenue from commodities at the 12 biggest investment
banks totaled $3.6 billion in 2018, down from $8.3 billion in 2011,
according to research and analytics firm Coalition Development
Ltd., which measures trading and financing revenue.
Goldman Sachs Group Inc. is the latest bank planning to cut back
its commodities-trading arm, The Wall Street Journal reported
earlier this year.
"We're going through another period of intense bearishness in
global oil markets," Mr. Goehring said. "It's been a little
frustrating."
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com and Ira
Iosebashvili at ira.iosebashvili@wsj.com
(END) Dow Jones Newswires
June 16, 2019 21:21 ET (01:21 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.