Crude Falls As US/China War Rages On

Smaller Than Expected Drawdown

Crude oil prices crashed lower again this week as the latest report from the Energy Information Administration showed that US crude stocks fell less than expected last week. The EIA report showed a fall of just 300k barrels in the week ending May 24^th. This was despite analyst forecasts of a 5.3 million barrel decline. This shallow dip comes on the back of three straight weeks of increases in US crude stores. This has raised concerns around the supply/demand environment as US crude production continues to soar.

Gasoline Production Falls

Elsewhere the data showed that gasoline production was also lower last week, averaging 9.9 million barrels per day. Distillate fuel production also decreased last week, averaging 5.2 million barrels per day.

Furthermore, there was a drop in US crude oil imports. These averaged 6.9 million barrels per day last week, down by 81,000 barrels per day from the previous week. Total products supplied over the last four-week period averaged 20.3 million barrels per day. This is down by 2.0% from the same period last year.

Trade War Fears Weighing on Oil

The bearish reaction to the report has been amplified given the current backdrop for oil. Investors worry about demand levels in the face of the recent intensification of the trade war. Following Trump raising tariffs to 25% on $200 billion of Chinese goods, China then responded with its own retaliatory 25% tariffs on $60 billion of US goods. Shortly after the Chinese retaliation, the US announced that it was adding Chines tech firm Huawei to the “Entity List”. This list prohibits US companies from dealing with it without permission from the government.

This week, China stepped tensions up once again as it made veiled threats regarding the potential for restricting the supply of rare earths. These are used in many high tech applications such as magnets and instrument displays.

As the current conflict shows no sign of abating, despite the two sides still being engaged in trade negotiations, it seems that the market is reflecting the sense of fear currently gripping trading floors. Last year, the trade war weighed heavily on oil prices as world growth was hurtling through the floor.

Traders now fear a similar situation could manifest over the remainder of the year given the willingness of both sides to engage in tit for tat reactions. Indeed, Trump has recently said that he is still deciding on whether to tariff the remaining $300 billion of Chinese goods entering the US each year.

Technical Perspective

The slide in oil prices from the 66.50s highs has seen price breaking down through some key technical levels. Price was recently stalled at the 57.52 structural level which also hold the 38.2% Fibonacci retracement from the 2018 lows. Below here, the next key structural level is the 55.28 level with the 50% retracement coming in just below that at 55.41. This level also holds the completion of a corrective symmetry swing, mapping the last decline into the 2018 lows before the reversal higher. This could prove an ear of medium-term demand taking oil higher again. To the topside, a retest of the broken 57.52 level should offer resistance, keeping focus on a further move lower.