Is a New Bear Market Forming in Oil?

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Oil continues to be a drag on the markets. The Federal Reserve has been disappointed that inflation hasn’t been performing up to its target, and one such muting tool against inflation is stubbornly low oil prices translating into lower gasoline prices. Now investors have to deal with slowing demand and excess supplies at a time when the U.S.-China trade war is likely to continue adding pressure on to the global growth story and is likely to lower fuel consumption.

With the U.S. crude benchmark oil settling down almost 2% at $53.63 per barrel, the price of Brent Sea crude has now dropped by more than 20% to just under $59 per barrel after peaking in April.

President Trump’s latest round of tariffs caught the oil bulls off-guard and the move could lower the global oil demand if enacted in September.

A new outlook from the Energy Information Administration projected lower growth in global oil consumption for 2019. That was apparently the seventh consecutive month that the EIA has lowered expectations. Gasoline demand in the United States has also not been a strong as expected during the summer driving season when families are on the move and while the entire country can drive without worries about weather.

GasBuddy, a national gasoline price-monitoring service, has even suggested that gasoline prices could even drop another 50-cents more by Thanksgiving.

U.S. oil prices had risen above $75 late in 2018, but that move higher was sharply interrupted into the late sell-off. President Trump’s reinstating sanctions against Iran hasn’t managed to keep energy prices higher, and several U.S. companies are lowering their planned drilling and capital spending projects based on more muted growth.

Another issue adding concern is that the oil market is dealing with Fed Chairman Jerome Powell’s stance that the rate cut a week ago was a mid-cycle adjustment rather than an announcement that the Fed was going to embark on multiple interest rate cuts throughout 2019. The market had been hoping that the rate cut would be an easing cycle, and the hope there is that it could increase oil demand.

Along with the EIA lowering demand, fresh oil demand cuts have been issued by Merrill Lynch and by Goldman Sachs. Merrill Lynch seemed more cautious around what a new round of tariffs would do to oil demand.

Expectations are soft for Wednesday’s Department of Energy expected release. Dow Jones published that its estimates are projecting for oil inventories to have fallen by 2.8 million barrels for the week ended August 2, 2019. Gasoline inventories are expected to be down by 1.2 million barrels while the refinery utilization rate is expected to be up 0.5% to 93.5% in the weekly data.

Both Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) slid lower after last Friday’s earnings disappointed investors, and higher dividends from larger oil and gas stocks may only offer mild enticement to new investors at this point. Many smaller oil players have seen their shares take it on the chin after announcing lower production and spending cuts. Whiting Petroleum Corp. (NYSE: WLL) was trading at $17 just a week earlier, and it is now down under $10.00.

Even the toll road sector of master limited partnerships has been hit hard during this last sell-off. The Alerian MLP ETF (NYSEArca: AMLP) was looking as though it was ready to stay above $10.00 with July being much firmer. Unfortunately, its price is back down to $9.32 for the lowest share price going back to the start of 2019. MLPs are supposed to be less prone to rising and falling with oil and gas prices, but it seems that the sector now loves to sell-off when oil prices go down and only recover slowly when oil prices rise.

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