Oil Will "Go Bust" If Recession Hits

Oil prices plunged last week, dragged down by fears of slowing demand, and shrinking geopolitical risk premia.

An unexpected increase in inventories underscored the downside risk to oil prices. The EIA reported a drawdown in crude stocks, but a huge 9.25 million barrel combined increase in gasoline and diesel inventories, which surprised traders. Also, gasoline demand plunged by 0.5 mb/d in the week ending on July 12, although week-to-week changes are typical and make the data a bit noisy.

Crude prices sold off on the news, falling by nearly 3 percent on Thursday.

The data release renewed fears of a slowdown in demand. But cracks in U.S. demand are larger than one week’s worth of data. “The [year-on-year] increase in demand for the year to 11 July was just 29 thousand barrels per day (kb/d), up 0.1%,” Standard Chartered wrote in a note.

“Demand will have to be strong for the rest of the year if consensus forecasts for 2019 growth are to be achieved.”

The investment bank sees U.S. oil demand only rising by 89,000 bpd this year, while the EIA expects a stronger 248,000-bpd increase. Standard Chartered says U.S. oil demand “appears consistent with a slowing economy.”

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