A weeks-long run on climbing crude oil prices came to a halt Friday courtesy of a combination of heightened geopolitical and economic tensions involving China.
Front-month NYMEX WTI crude prices fell by 5% early Friday before paring some of the losses and rising back above $33/b later in the day. The action in the oil markets came after China brought a double-shot of news Friday, as the world's most-populous nation scrapped its 2020 GDP growth target and announced a stricter national security plan for semi-autonomous Hong Kong that immediately brought condemnation from the US and other nations.
Crude futures had been on a steady upward trajectory since late April after NYMEX WTI rebounded from a historic negative front-month price and climbed back above $30/b.
NYMEX July WTI settled Friday at $33.25/b, down 67 cents for the day, with contango pricing remaining in effect. July ICE Brent similarly fell 93 cents/b to $35.13/b, maintaining a nearly $2 price gap between the two benchmarks.
"Geopolitical risks alongside an exhausted rally from improving supply-demand fundamentals have oil prices trading lower," said Edward Moya, senior market analyst with OANDA. "A good part of the recent oil price rally was attributed to China's recovery, which saw crude demand return to near pre-pandemic levels. But, now, the outlook is starting to look wobbly."
Global oil demand is still projected to fall by more than 10% for all of 2020 amid the ongoing pandemic, and any escalating conflict between the US and China can exacerbate matters.
"You can't have the two largest economies potentially ending economic harmony and have investors expect the oil market to continue go its way towards balancing," Moya added.
In refined products activity Friday, NYMEX July RBOB was down 0.69 cent/gal at $1.0382/gal, and July ULSD dropped 0.70 cent/gal to 98.20 cents/gal.
CHINA WATCH
Although economic activity and oil demand in China have risen faster than anticipated after the height of the pandemic lockdowns, the country still has plenty of economic concerns and fears of a second wave of positive tests taking hold.
In the said environment, China did away with its annual economic growth target for the first time in decades, opting not to release a revised goal.
And then US Secretary of State Mike Pompeo on Friday followed up with strong words criticizing China's approach to Hong Kong, setting up another potential geopolitical confrontation.
Pompeo said the proposed national security crackdown "would be a death knell" for the partial autonomy promised to Hong Kong more than 20 years ago.
"The United States strongly urges Beijing to reconsider its disastrous proposal, abide by its international obligations, and respect Hong Kong's high degree of autonomy, democratic institutions, and civil liberties, which are key to preserving its special status under US law," Pompeo said in a statement.
A flash survey on energy sector concerns released Friday by Evercore ISI said the biggest concern remains a strong second wave of global coronavirus cases, but the biggest rising worry after the pandemic is heightened US-China tensions.
Apart from the China issues, Friday's oil pricing movements also represented a natural time for a small market correction, said Paola Rodriguez-Masiu, senior oil market analyst for Rystad Energy.
"The prices of oil have been rising and rising and rising over the last couple of weeks," Rodriguez-Masiu said. "Although there is reason for the higher levels, a constant increase is not sustainable or justified.
"The market situation is definitely better than a few weeks ago," she added, "but that doesn't mean that the market is still not stretched and that it is suddenly balanced. Oil production is still above demand levels and there is a lot of uncertainty about the future of how the COVID-19 pandemic will evolve."
