Why oil prices plunged today
Oil traders – along with financial markets everywhere – were disappointed by the US central bank's decision despite the first cut in interest rates since the global financial crisis a decade ago.
The Fed cut interest rates by 25 basis points Wednesday, and it was thought that monetary easing would push stocks and commodities up. Crude oil, priced in dollars, tends to benefit from the central bank's cut rate, as it tends to weaken the dollar and make oil more affordable for large parts of the world.
However, the markets were clearly disappointed. Shares plunged late on Wednesday and oil opened sharply on Thursday. The dollar was up while WTI and Brent went down almost 3 percent.
The Fed said it was acting to maintain economic expansion, but the decision had some disagreements. Some in the Fed's board at all opposed an interest rate cut because of the strength of the economy. But financial markets really fell after Fed chairman Jerome Powell essentially said that the central bank did not embark on an extended period of loosening.
The financial markets had largely baked in at least 25 basis point cuts, and had hoped for more.
“The position is not well communicated. The policy statement was ambiguous and frankly he has not done anything to make it clear, Jefferies CFO Ward McCarthy told CNBC. "He seems unsure. My thanks are that they are worried about the risk of inconvenience. Since they have already taken the step [to cut rates] they will probably take another, but his comments and the two dissents suggest that this is not the beginning of a major relief cycle, and that's what hampered the market. "
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The disappointing announcement was bolstered by some poor financial data "US manufacturing activity fell to its weakest rate in three years, according to the Institute for Supply Management. In July, eurozone production activity dropped at the fastest rate since 201[ads1]2. It could provide a new relief from the European Central Bank." The euro area PMI dashboard is a sea of red, with all the lights that signal the poor health of the region's producers, "said Chris Williamson, chief economist at IHS Markit, according to Reuters.
Global demand Earnings after air freight fell by 3.4 percent in May, the seventh consecutive month of contraction, perhaps another sign of a weakening economy. Falling air traffic will have an impact on demand for jet fuel and ultimately demand for crude oil.
"Looks like the market didn't like the unique Fed decision yesterday," Kyle Cooper, IAF Advisors Research Director, told Bloomberg. "Businessmen are shifting their focus and are getting a little nervous about demand uncertainty, especially since China-US trade talks have stopped again."
It all came before the really big market news on Thursday.
Apparently out of nowhere, President Trump tweeted that the United States would increase tariffs on China's remaining $ 300 billion in imports. A 10 percent fee would hit these items on September 1.
Markets threw themselves on the news, with crude oil of 8 million.
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The US-China trade negotiations have largely gone nowhere. The two sides wrapped up a brief round of talks this week, "with little sign of progress except an agreement to meet again next month," Reuters reported.
It's not hard to imagine Trump's trade negotiators reporting back on the lack of progress in trade negotiations, which led to the president picking up the phone and taking to Twitter.
Earlier, President Trump had emerged as withdrawing the possibility that no deal would be likely before the 2020 elections, and tweeted that China was probably expecting him in hopes of a new president.
The escalation of the trade war creates a whole new mess for the oil market. Higher tariff rates will hit demand in China and potentially slow down both economies – and have an impact on the world economy. All of this is hugely negative for crude oil. The problem is that the oil market was nevertheless facing a threatening supply surplus, with demand that was poor following supply growth.
By Nick Cunningham of Oilprice.com
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