Oil slumps as Powell warns of an economic slowdown

Concerns about weakening economic growth in major economies saw commodities come under further downward pressure.

Crude oil’s selloff deepened amid increasing expectations of an economic slowdown. Fed Chair Jerome Powell warned that it’s possible the US will have a mild recession, even though the Fed’s forecast is still for modest growth. This followed the central bank’s move to hike rates another 25bp, which he said was “not far off” from a restrictive level. The oil market’s bearish expectations are highlighted by a collapse in the Brent crude prompt spread. The difference between July and August futures have narrowed from USD0.43/bbl at the start of the week to only USD0.15/bbl. Concerns of weaker demand were amplified by government data. US gasoline demand tumbled 900kb/d last week to 8,618kb/d. Inventories also jumped 1,742kbbl, despite a drawdown in crude oil inventories of 3,285kbbl. They are anow at their lowest since February. With the physical markets not flashing any strong signs of strength or weakness, the market took a glass half empty approach. The recent selloff is expected to be discussed in detail by the OPEC+ alliance at its next meeting on 3-4 June. Since the group announced it would cut output by 1.6mb/d, prices have fallen more than 15%. The agreement came into effect at the start of May, but persistently high exports from Russia have raised doubts as to its effectiveness.

The selloff across oil markets dragged European gas lower, exacerbated by rising supply. Western Europe’s LNG imports jumped to a record 10.6mt in April, driven by shipments into France, Belgium and the Netherlands. The US supplied about 50% of the fuel, while Russia made up roughly 10%, according to Bloomberg data. This has helped push inventories higher, with gas storage levels hitting 60%, well above normal for this time of the year. North Asian LNG spot prices were relatively unchanged with many Asian markets still closed.

Fear of weaker economic growth from developed economies weighed on sentiment in the base metals sector. Copper fell to its lowest level since the start of the year. The market has become increasingly frustrated with the slow rebound in economic activity in China. This has seen investors reduce their net bullish positions on LME copper to a six-week low.

Iron ore futures fell in Singapore as expectations of a post-holiday rally faded. Inventory levels of steel have weighed on the industry since March. They rose 1.2% to 18.5mt in mid-April compared with early April, according to data from China Iron and Steel Association. Daily steel production at major steelmakers was also lower at 2.29mt. This is likely to improve in the short term with China’s official manufacturing PMI also dipping into contractionary territory.

Gold gained after Powell hinted policy makers may consider pausing rate hikes. This dragged down yields on government bonds, making it more attractive to hold the precious metal.