25 August 2015 – Crude markets edged up but remained near 6.5-year lows on Tuesday, following a session that saw prices fall as much as 6% after a Chinese equities rout sent global markets into a tailspin.
Asian stocks resumed their slides on Tuesday, with China’s and Japan’s major stock indexes tanking again in early trade, sparking fears of a hard landing for the Chinese economy, the world’s most important growth engine.
Crude markets reacted cautiously in early trading, edging up but remaining at levels comparable to the peak of the global financial crisis in 2009, suggesting that worries over the economic outlook in China, the world’s second-largest oil consumer, are now at least equally as big as previous concerns of oversupply that has plagued the market for over a year.
US crude futures were trading up 32 cents at $38.56 per barrel in early trade on Tuesday, while Brent was up 27 cents at $42.96.
Goldman Sachs said that while China’s turmoil would not lead to a global recession, it did expect the trouble to result in weak commodities.
“Recent economic and FX weakness in China and other emerging markets will not tip the global economy into recession,” the bank said, but it added that “we see a meaningful risk that markets are over-interpreting the collapse of oil and commodity prices as a negative growth signal.”
Yet the bank said that due to improved marginal costs, which it estimates to have improved by 20% for US shale drillers, “commodities will underperform” relative to other assets.
ANZ bank said that “the sharp (oil price) decline was driven by concerns around slowing Chinese demand just as Opec and the US expand a global glut”.
Opec output has hit records in a bid to squeeze out competition especially from US shale producers. But they have so far been resilient to the resulting price plunges and kept pumping oil.
ANZ noted that hedge funds had reduced their net-long position in WTI to a five-year low last week, and technical indicators also remain bearish.
Reuters analyst Wang Tao said that US crude could drop to $37.05 per barrel, based on a Fibonacci analysis, and that Brent could target $40.29.