Crude Remains in Calm Waters, but for How Long?

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Kenny Fisher

Fri, Sep 27, 2019, 3:49 AM

Crude Prices Under Downward Pressure

Crude oil prices are down 3.1% week, after climbing 6.7% the week before. There are several reasons for the downward pressure which has pushed crude to the mid-50s level this week. First, there was the surprise buildup in U.S. crude stockpiles of 2.4 million barrels last week, marking back-to-back surpluses. Second, Saudi Arabia has managed to restore its oil production faster than expected, after a key oil refinery was damaged earlier this month, which sent oil prices surging higher. On Friday, China reported a drop in industrial profits in August, which has raised concerns that the Chinese economy continues to slow down. China is the world’s second-largest consumer of oil, so oil prices are sensitive to Chinese economic releases. We’re unlikely to see much movement from crude for the remainder of the day.

Will U.S. Slowdown Weigh on Crude?

After a robust first quarter, in which the U.S .economy grew by 3.1%, second-quarter growth has been significantly lower, at just 2.0%. A slowdown in the U.S. economy has investors worried that this could lead to reduced demand for oil and send oil prices lower. Given that the global economic picture is not particularly bright, weaker demand for oil worldwide could push oil prices further down, perhaps to the $50-level. At the same time, a factor in favor of higher oil prices is geopolitical instability, in particular in the Persian Gulf. The recent attack on a Saudi oil refinery triggered double-digit gains for crude, and exposed the vulnerability of oil supplies. A breakout of hostilities involving Iran and its neighbors could result in oil prices soaring upwards.