- US crude inventories rose by 8.664 million barrels last week.
- Concerns of a trade war between China and the US weighed on sentiment.
- US private employment increased by a bigger-than-expected 183,000 in January.
Oil prices collapsed on Wednesday after data revealed an unexpected surge in US crude oil inventories, pointing to weak demand. At the same time, concerns about a trade war between China and the US put downward pressure on prices.
Data on Wednesday revealed that US crude inventories rose by 8.664 million barrels last week. Meanwhile, economists had expected a 2.4 million barrel increase. The jump indicated weak demand, leading to a decline in oil prices.
WTI and Brent futures (Source: ICE, NYMEX)
Meanwhile, concerns of a trade war between China and the US weighed on sentiment. Notably, the US imposed tariffs on Chinese goods on Tuesday, leading to an immediate response. China imposed tariffs on specific US goods, including oil. The country is the largest consumer of oil, so tariffs on oil imports will likely weaken demand. Meanwhile, if the US decides to impose tariffs on Chinese products, it could possibly harm China’s economy, resulting in a decrease in the demand for fuel.
However, there was some relief when Trump paused a 25% tariff on goods from Canada and Mexico. The two countries were able to negotiate better trading terms that saw the US president pause tariffs for some time. This reduced the risk of global trade wars that would have had a more significant economic impact. At the same time, the US dollar collapsed, making oil cheaper for foreign buyers.
Meanwhile, market participants are keeping an eye on developments between the US and Iran. Top officials in Iran are worried that Trump might impose sanctions on the nation. Such an outcome would hurt oil supply by reducing exports from the country. This, in turn, would tighten the market, raising prices.
Elsewhere, US data on Wednesday revealed that private employment increased by 183,000 in January, beating forecasts of a 148,000 increase. The upbeat data pointed to a strong labor market. However, market participants are waiting for the nonfarm payrolls report due on Friday for clues on future US monetary policy moves. Notably, investors a fully pricing a Fed rate cut in July. However, this might change with incoming data.
Meanwhile, a report on business activity showed a drop in the services sector that could pressure the Fed to lower borrowing costs. The ISM services PMI fell from 54.2 to 52.8.
