Trade Wars & Recession Fears Fuel Volatility

Turbulent Times

It’s been another volatile week for the crude market as traders have seen strong moves in both directions. The market was buoyed earlier in the week by some unexpected news. Some of the goods due to be hit by new 10% tariffs in September, will now be exempt until December 15^th. The US Trade Representative released a statement on Tuesday saying that due to “health, safety, national security, and other factors”, some of these goods will see the tariff postponed. Trump told reporters that the decision was aimed at reducing costs for US shoppers over the Christmas season.

US Recession Fears Growing

The news was met with a strong relief rally across risk assets, which lifted oil prices. However, the bounce proved to be short-lived as markets then traded lower on growing fears of a global recession. InGermany, GDP contracted over Q2. This means that the second-largest economy in the eurozone is now on the brink of recession for the first time in a decade. The data follows a spate of weak sentiment data, with Ifo readings already highlighting a recession.

Meanwhile, movements in US treasury yields have also raised concerns. This week, yields on US 2Y treasuries moved above yields on 10Y treasuries for the first time since 2007. Typically, such movement has preceded a recession in the US. Equities have moved sharply lower subsequently, weighing on oil prices.

Goldman Sachs Warn Of Recession

The market will be keeping a close watch on both the US/China trade situation and the prospect of a recession. Indeed, the move in treasuries comes just after Goldman Sachs issued a client note last week. They warned that the risk of a recession is rising in the US.

US Crude Stores Rise Again

The latest industry data has added further downside for oil with the EIA reporting a second consecutive weekly build in US crude stores. The report from the Energy Information Administration covering the week ending August 9^th showed Crude inventories increased by 1.6 million barrels. This beat analyst expectations for a decline of 2.8 million barrels. Now sitting at 440.5 million barrels, inventories are roughly 3% above the five-year average for this time of year.

Gasoline demand Hits Record Highs

However, the report wasn’t all bearish. Gasoline stores were seen down by 1.4 million barrels, this was in contrast to forecasts for a 25,000 barrel increase. Gasoline inventories are now 4% above the five-year average for this time of year. The report also noted that US gasoline demand rose by 281,000 barrels per day to a record 9.93 million bpd last week.

Technical Perspective

The initial rally in crude this week saw the continued reversal off the recent 50.69 lows with price exploding higher to break above the 54.95 level. However, the rally was capped as it tested the bearish trend line from 2019 highs. This turned price lower once again, moving back below the 54.95 level, which price is currently hovering around. While above here, a further topside run looks likely with bulls eyeing a break of the 57.39 level. However, if we fail here, bears will need to see a break of lower support at 53.60 to open the way for a deeper run down to test the 50.69 lows once again.