Crude oil prices have been unusually turbulent this week. This volatility is a result of a combination of economic indicators, geopolitical events, and market response. As the market digests information regarding job openings, manufacturing activity, and international trade tensions, crude oil has been on a rollercoaster ride. Falling demand analysts expect that continued economic uncertainties and external pressures will cause prices to fall even further.
For the first half of this week, crude oil prices jumped around based on conflicting economic signals. Coming up against three job openings likely falling off a cliff and a terrible ADP employment report. At the same time, initial jobless claims jumped sharply last week. All these factors made a strong bearish case for crude oil as investors were forced to reevaluate demand projections. The current economic landscape in the United States carries a severe anticompetitive burden for the energy sector.
Economic Indicators Influence Market Sentiment
The worst may be yet to come, as the most recent data, released this week, showed a dire snapshot of the US economy. In April, national manufacturing activity experienced its greatest contraction in five months. This significant drop led to worries of an impending economic downturn and a possible reduction in crude oil demand. The economy is still recovering from a 0.3% contraction during that first quarter. This drop in use increased worries about inflationary pressures that could affect oil demand.
In light of this information, energy stocks related to crude oil have underperformed despite an initial boost from political developments. Renewed intrigue from dip buyers was short-lived last week, thanks to former President Donald Trump’s threats to ramp up sanctions on purchasers of Iranian crude. That new interest faded once larger economic issues came to the fore. Our never-ending trade war with China has caused tariffs to increase to 145% on imported Chinese goods. Chinese buyers are said to be unwilling to pay these premium costs.
Market analysts are understandably watching these developments with great interest, as almost 1 in 5 products sold on major platforms like Amazon and eBay come from Chinese sellers. Additionally, 60% of third-party sellers have exposure to Chinese markets. This interrelationship makes forecasting for crude oil prices difficult and injects a second layer of risk.
Price Pressures Persist Amid Trade War Uncertainties
Further complicating crude oil market pressures is the ongoing, escalating trade war between the United States and China. As tariffs continue to climb, the pressure on the US dollar becomes the determining factor in market direction. A further complication is that a weaker dollar will tend to push global oil prices up. Looking at today’s trends, with escalating tensions it appears the path of least resistance is down on oil prices.
As of the writing of this blog, reports indicate that crude oil prices have dropped below $57. This decrease is a clear indication that Saudi Arabia has decided to permit these prices to fall. This change indicates a notable turn in OPEC’s strategy in the face of growing pressures from a range of economic trends and geopolitical tensions.
Let’s hope the Labor Department’s next Non-Farm Payrolls (NFP) report holds good news. The consensus among analysts is for an increase of 138,000 new nonfarm jobs over last month. This figure likely would have had downstream major impacts affecting projections of future crude oil use and the overall economic forecast. As he settles into office, job growth is floundering. In this optimistic scenario, we might expect that crude oil prices would fall as low as $50 per barrel.
Future Outlook for Crude Oil Prices
Especially with weak economic data and major geopolitical concerns, analysts say further support for crude oil prices is unlikely. They forecast this trend to continue in the near future. It follows an order streak that started at the beginning of the year and a production rate that was already on the outs, declining substantially. These trends are squeezing jobs from both sides and leading many to question the strength of future demand for crude oil.
The eurozone’s eventual Consumer Price Index (CPI) will be a big influence on crude oil. Finally, the trend of the US dollar will set the near-term market direction for oil prices. As energy markets continue to wrestle with these overlapping dynamics, volatility is likely here to stay.