Oil prices plunge again

Oil Prices Plunge As Storm Clouds Gather Over Global Economy

Zero Hedge,

2 November, 2014

Oil declined more than 3% on Thursday, and extended those losses Friday, with ICE West Texas Intermediate (WTI) Light Sweet Crude Oil Futures probing lows not seen since April, due to weakening global demand at a time when the output from the Organization of the Petroleum Exporting Countries (OPEC), Russia, and the U.S. is rising.

Record crude production from the U.S. and Russia, along with a surge from OPEC, has once more created oversupplied conditions.

Russian, U.S. & Saudi crude oil production (data via Reuters Eikon Graphics) 

Oil prices started declining in early October on fears that global economic momentum was waning as the U.S-China trade war escalates, and a slowdown in emerging market economic data (primarily in Asia) was becoming more evident.

Global Crude Futures (data via Reuters Eikon) 

WTI has plunged 17% since its 76-handle probe in early October. Analysts told Reuters they anticipate more selling in coming sessions, noting that oil did not bounce on Thursday on weakness in the dollar, nor did it positively correlate with the rebound in equity markets.

WTI monthly futures (data via Reuters Eikon) 

Besides global growth momentum waning, another reason for downward pressure in oil could be that Washington just granted several waivers on sanctions on Tehran, allowing countries like South Korea, Japan, and India to continue to import Iranian crude (in other words, more supply).

John Kemp, Reuters Senior Market Analyst of Commodities and Energy, believes oil prices are falling as a broad range of financial and real-economy indicators show the global economy is slowing.

"The depth and duration of the slowdown is impossible to gauge at this point, whether it turns out to be simply a mild and short-lived “soft patch”, a longer but still positive “growth recession” with output falling relative to trend, or an “outright recession” with activity falling in absolute terms.

Recent declines in equity markets and softness in freight indicators may turn out to be a false alarm or a pause within an extended cycle rather than mark a cyclical turning point.

Most commentary about the economic cycle is still influenced by the last deep and wrenching recession which accompanied the global financial crisis in 2008/09.

But severe recessions have not been common since the end of the Second World War and most downturns have proved milder, which therefore seems a more likely prediction for the next cyclical slowdown.

In the United States, post-1945 recessions have tended to be short, lasting less than a year in most instances, and in some cases have seen business activity level off rather than decline," said Kemp.

Kemp provides historical charts on the business cycle: 

Duration of U.S. business cycle (expansion) since 1858 

Duration of U.S. business cycle (expansion) since 1857

Duration of U.S. business cycle (complete cycle) since 1857

If the economy is at a turning point (or a cyclical peak), the sequence of events to follow by the Trump administration would likely involve some combination of fiscal expansion, monetary easing, and or possible reduction in trade tensions. A further slowdown in global growth could send oil prices much lower, as consumption growth declines while production continues to accelerate.

It seems like today could be one of those rare points in time when macro fundamentals and technicals are possibly lining up to signal that one of the most extended bull markets ever is hitting a brick wall. As of now, watch oil prices as a proxy to global growth.

Global Shipping Rates Sink As Trade Runs Aground

The Baltic Dry Index, a composite of the Capesize, Panamax and Supramax Timecharter Averages, hit a one-month low this week, pulled down by weaker demand for Capesize vessels. The shipping index is widely viewed as a proxy for dry bulk shipping stocks as well as a general shipping market barometer.

Baltic Dry Index quote (data via Reuters Eikon) 

 

In August, we first reported that freight data via Goldman identified global trade momentum was slowing since 4Q17, and that July readings suggested an alarming continuation, and in some cases acceleration, of this trend.

The deceleration in shipping rates has closely tracked a tightening in global financial conditions, particularly evident in EM data, which in turn has largely been a manifestation of the ongoing escalation in trade tensions between the US and China.

Now, fresh evidence from Reuters shows the cost of chartering commercial ships has collapsed even further. More specific, rates for container ships have sunk 24% from a multi-year peak while raw material vessel rates have fallen 10% from a five-year high, adding to the mounting evidence that slowing global trade could soon usher in a worldwide recession around 2020.

Container Rates Collapse

At the heart of the supply chain, dry-bulk vessels transport raw materials like grains, coal, ore, and cement while container ships complete the cycle by carrying finished goods from factories to consumers.

Around April, dry-bulk and container rates rocketed to multi-year highs as manufacturers pulled forward consumption to get ahead of the tariffs. The rates peaked in August and started a declined that found a bottom in September/October.

Baltic Exchange Indices Performance

“The flattening out of the Baltic dry index, corroborated by the container index as well, points to a slowing down of the global economy for sure,” Ashok Sharma, managing director of shipbroker BRS Baxi in Singapore, told Reuters.

Frederic Neumann, co-head of Asian Economic Research at HSBC in Hong Kong, said: "global trade is cooling off after a strong run over the last couple of years."

Neumann said demand issues in Europe and China, emerging market stress, as well as trade war escalation, were all significant factors into the slowdown.

He then warned: "their [tariffs] full effect hasn’t kicked in yet."

The Harper Petersen Charter Rate Index, which is published on a weekly basis, tracks rate levels in US Dollars of container ships, had dropped by about 25% from June when it was at a seven-year high to 516 points.

The Freightos Baltic Index, a global container index launched in Singapore in 2017, climbed to a record high in August but has since declined 5.4% to 1,583.

Shipping analysts told Reuters that declining container market rates tend to reflect changes in developed economies while emerging countries more influence bulk shipping markets.

“Now that the trade war is escalating... I have no doubt that this does have a negative impact on containerized trades,” said Ralph Leszczynski, head of research at shipbroker Banchero Costa in Singapore.

Leszczynski said the reversal in dry-bulk rates was partly due to damaging trends in emerging markets, where local currencies in India, Turkey, Brazil, Pakistan, and Indonesia have severely weakened against the US dollar this year, reducing their ability to import.

The most important take away from the report is the idea that developed world economies are slowing. The decline in container rates shows that, and it seems the worst has yet to come. Storm clouds are gathering for 2019, as President Trump's trade war has entered the point of no return, the damage has been done, prepare for a global slowdown.