Crude oil prices have dropped, turning this year's bull market into a bear market.
Oil prices rallied nearly 50% from January to April this year on the back of the Fed's pause; China's stimulus measures and expectations of continued easy policy by the central banks of the Eurozone and Japan, among others; and (at the time) hopes for a US-China trade deal, improving sentiment over the global growth outlook and therefore, oil demand.
Taken alongside, supply disruptions/sanctions in Venezuela, Libya, Iran and others, plus the implementation of the Organisation of the Petroleum Exporting Countries (OPEC), Russia and other oil producers cut output by 1.2 million barrels per day (mpd) from 1 January 2019, and the rise and rise in crude oil prices come as no surprise.
Escalation of trade tensions, fears of a US recession and increased oil supply concerns sent crude oil into a bear market.
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WTI oil has fallen by 22.2% to US$51.57/barrel from its April peak of US$66.24. Brent oil has slipped by 19.2% (not quite satisfying the technical definition of a bear market, but getting there) to US$60.56/barrel from US$74.94.
The slide in oil prices is likely to intensify as global demand takes a hit from even weaker economic activity. In its June report, the World Bank recently downgraded its global GDP growth forecasts to 2.6% this year (from 2.9% it predicted in January) and 2.7% (from 2.8%) in 2020.
Similarly, IMF managing director Christine Lagarde warned that, "US-China tariffs-including those implemented last year-could reduce global GDP by 0.5% in 2020 (see chart, bottom panel). This amounts to a loss of about US$455 billion, larger than the size of South Africa's economy."
The US Energy Information Administration's report showing that total petroleum inventories rose to 22 million barrels - the highest amount since 1990 - in the last week of May, and that oil production also hit a record, indicate further downward pressure on crude oil prices from the supply side of the supply-demand equation.
This increased supply from the US will likely be counteracted by OPEC and non-OPEC oil producing countries when they meet at their scheduled meeting on the June 25 to decide whether or not to extend the 1.2 mpd cut in oil production (set to expire at the end of June), or even impose a greater reduction in output.
Much will depend on the trend in oil prices leading up to the meeting.