Despite a massive crude inventory draw, that initially sent WTI higher, it appears the weight of anxiety over global demand – stoked by an escalating trade war – further augmented by a soaring dollar, has sparked an avalanche of selling in the energy complex.
“There’s no doubt that that uncertainty continues to weigh, not only on the crude oil markets, but really all markets,” said Brian Kessens, who helps manage $16 billion in energy assets at Tortoise.
Oil has settled a whopping $5.46 lower, or over 7% down on the day, which is oil’s biggest drop since Feb 2016.
“There is growing concern among market participants that the trade war will affect the real economy and put the brakes on global economic growth,” Commerzbank analysts said in a daily note. “We see the price slide as excessive given that Asian stock markets for example have suffered more minor losses in response to the latest development in the trade war. We expect to see a pronounced countermovement if the situation calms down again.”
But it’s not just oil: the entire metals space is getting hammered on fears of a Chinese – and global – economic slowdown, with copper prices plunging as much as 4% in London, the biggest drop since December 2017; futures have lost almost 17% since peaking in early June.
Additionally, zinc, nickel, lead and tin all plunged on the London Metal Exchange as did shares in miners and metals companies including BHP Billiton and Antofagasta.
Agricultural commodities also dropped, with wheat down 4%, corn fell to a five-month low, U.S. soybeans slid to the lowest since 2015 and cotton sank 2%: in fact, the Bloomberg agriculture subindex has dropped to a record low price.
“The list will almost certainly mean retaliatory measures being raised by China,” said Charles Clack, an analyst at Rabobank in London. “So markets are still very concerned about the issue. We’ve seen China target agricultural products so far, so there is a fair chance of them continuing down this route on fresh tariffs.”
Gold was also hammered despite its safe asset nature, largely due to the relentless dollar surge. Other precious metals including platinum and silver are even harder hit because of their industrial use.
“The more industrially exposed the precious metals are, the further they’re down in trading today, but it does look like it’s a currency impact as much as anything,” said CMC chief market strategist Michael McCarthy.
The weakness has been so broad based that the Bloomberg Commodity index tumbling -2.7%, its biggest one day drop since November 2014!
Ironically, as commodities plunge, the prices of a whole slew of consumer products – those made in China – are about to surge as a result of the upcoming tariffs. How the US economy responds to this bifurcated price response, with deflation hitting commodities on fears of an economic slowdown alongside more highs in the dollar coupled with inflation for staples and other consumer products, may determine just how much longer the Fed can go on pretending it will hike rates another 7 or 8 times before it has to stop, start easing, and perhaps even do more QE.