Let’s start with the supply concerns. Even though the members of the Organization of Petroleum Exporting Countries (OPEC) have lost some clout in the crude oil market now that the United States is producing so much crude of its own through its wildly successful fracking efforts, Saudi Arabia is still the 800-pound gorilla everyone pays attention to.
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The attacks didn’t lead to any environmental emergencies, but they did send shock waves through the global crude oil market as traders started to worry that oil supply out of Saudi Arabia could be disrupted as trade disputes between the United States and Iran escalate.
When supply is constricted or is forecast to potentially be constricted, the price of crude oil tends to move higher. That is exactly what we saw in early trading this morning. Crude oil shot up dramatically in two spurts in the run-up to the opening bell for the stock market on Wall Street. However, the rapid price increases were just the opening salvo in today’s crude oil volatility. As soon as the stock market opened, crude oil prices started to retreat.
To understand why, we now need to look at demand concerns. It took a few days for China to retaliate to the Trump administration’s tariff increases, but retaliate it did. China increased tariffs on $60 billion of U.S. goods to 25%, beginning June 1, to match the new U.S. tariff rates. As the trade war between the United States and China intensifies, traders are concerned that the global economy is going to slow down. A slowdown in the global economy would not only hamper corporate revenue growth but also drive down demand for crude oil.
Demand for crude oil tends to increase when the economy is expanding because more people tend to have jobs they have to drive to; more people tend to have money to spend on new cars, airline travel and goods that need to be shipped around the world and across the country; and more consumers, businesses and governments tend to spend more on construction – which increases the use of fossil-fuel-powered shipping and construction equipment.
The opposite happens when the economy starts to slow down, or contract. Demand for crude oil tends to decrease. When demand declines, or is forecast to potentially decline, the price of crude oil tends to move lower. That is exactly what we saw after the opening bell.
Crude oil lost ground for most of the day as traders worried that demand could be affected by the escalating trade war.
At the moment, it appears as though demand concerns are outweighing supply concerns in the crude oil market, but that could all change if tensions escalate between the United States and Iran or if the United States and China mutually decide to deescalate their trade negotiations.
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