Oil rout: economic fallout outweighing tight supply

Global stocks and commodity market slumped on Jul 5. Crude oil tumbled, euro sank, while US dollar spiked. It seemed that the rout on Tuesday began in Europe, rippling through exchange rate, stocks and commodity market, as the market took fright, concerns about economic downturn exacerbated and risk aversion soared.

In terms of crude oil, its supply and demand fundamentals are little changed recently, while the supply even tends to be tighter as production from Libya, Nigeria, Ecuador and Norway is slashed. OPEC+ announces to increase production, but the spare capacity is limited. Iranian nuclear negotiation slips into stalemate. However, crude oil price is barely boosted by those supportive factors. The reason behind that is crude oil market sentiment is hit by expectation of economic downturn, which outweighs the uncertainty on supply side.

It is forecast that weaker macro economic expectation could become a risk to the market in the latter half of 2022. When it becomes dominant, the uncertainty for crude oil would further increase. Currently, oil market is in the so-called bull-bear switching stage. In the background of economic recession expectation and tighter liquidity, the advancing momentum for risk assets tapers off gradually. Though concerns about crude oil supply shortage earlier and anticipation of increasing demand in driving season counteracts some risk, crude oil is weighed, as demand expectation changes with economic data refreshing new lows recently and EIA data showing unexpected rise in gasoline and refined oil stocks.

The worsening of global economy seems to be irresistible. The oil rout on Tuesday may come as a result of market fright, though it is difficult to forecast whether the economic fallout has come to an end. There’s still uncertainty for crude oil on supply side, and how the demand will weaken is not yet clear. Crude oil is unlikely to plunge continuously, but may keep consolidation. The focus is laid on any rebound after the slump and US Fed’s Jul interest rate hike progress.