WTI and Brent crude oil prices are trading lower by -0.7% at $53 and $61 per barrel respectively during the European Monday morning session as the risk aversion sentiment dominates the global markets on the rising worries for an extended global recession impacting the oil consumption demand after the new threats from US administration to impose a 5% tariff to all Mexican imports.

 

Crude oil prices hit fresh 4-month lows:

Both oil prices pressured as low as $52 and $60.70 per barrel respectively during the opening hours of the Sunday’s night Asian trading session. Oil contracts are suffering from a downside price momentum, losing around $13 or 20% in just only one month period after they hit yearly highs of $66 and $75 respectively at the end of April, mainly from the increasing market fear for an extended global economic slowdown which will weigh on the demand for petroleum products.

Furthermore, Saudi Arabian Energy Minister Khalid al-Falih, commended today on the gloomy oil outlook, saying that “the increase in the US-China trade friction and potential barriers would certainly have a negative impact on the global economy and oil demand growth”.

 

US hit Mexico with 5% Tariffs:

The Trump administration announced last Friday that the US will impose a 5% tariff on all Mexican goods entering in USA on June 10, until the illegal migrants coming through Mexico stop. He also said that the tariffs will gradually increase to 10% on July 01, then to 15% on August 01, 20% on September 01 and finally to 25% on October 01 and they will remain at 25% level until Mexican government stop the illegal inflow of immigrants.
In addition, the new tariffs will have a negative impact on the US energy market as Mexico is one of the largest US trade partners and major supplier of crude oil. The U.S. refiners import around 680k bpd of Mexican crude, while the 5% tariff will add an extra $2 million to the cost of their daily purchases, causing financial damages on their operations.

 

Global markets under pressure on recession fears: Risk Aversion sentiment:

The escalation of the trade tensions has entered in a new dangerous level after the decision by Trump administration to apply fresh tariffs on Mexico, increasing the fear for a global economic recession which will eventually impact lower the crude oil demand growth.
Investors on the fear for new recession have moved away from the growth assets such as Equities and Crude oil and preferred the safety of US T-Bills which the yield dropped to new low near 2.08%, German Bonds, Japanese Yen and Gold-Silver.

 

Bearish US Inventory report: Record high US oil production:

The weekly US Energy Information Administration (EIA) report showed last Thursday a smaller than expected fall in the US oil stockpiles which declined by 300k barrels to 476.5 million barrels for the week ending May 24. The report also showed the US crude production to rise back to a record 12.3 million barrels as well, adding more pressure to the oil prices.

 

Technical Picture:

 

WTI contract extended its last week’s price declines to new 4-month lows, testing the $52 level during the Asian trading session before rebounded near $53 during European session opening hours. The prices could continue the nose-diving drop and test the $50 psychological support level in case the market sentiment deteriorates, and oil sellers increase the pressure to the price.

Possible rebound could send the prices near $55 as part of a small relief rally and some short-covering trades. The daily RSI oscillator number has dropped below oversold level of 30, showing how fast and steep was the sell-off on the oil price while it could support a price rebound due to the oversold conditions.

 

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Vrasidas Neofytou

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