Oil Spill! Crude Collapses A Day After Sliding Into Another Bear Market

Wednesday was one of those days where deciding which asset to highlight is tough, because in one way or another, they’re all saying the same thing.

As we put it while documenting the collapse of the 2s10s to a 2007 low 8bps, “Today was brought to you by the letter ‘R’, for ‘recession'”. (That’s a Sesame Street nod, for anyone too young to recognize the reference.)

A trio of rate cuts overnight from New Zealand, India and Thailand made clear that policymakers across the globe are on high alert amid the incessant thumping of the war drum, both on the trade and currency fronts. Those rate cuts might well have gone too far down the road towards “confirming” the market’s worst growth fears.

Read more: Race To The Bottom Intensifies As Trio Of Surprise Rate Cuts Ripple Across Markets

Obviously, crude is caught up in the recessionary malaise, as concerns about demand destruction tied to a global downturn are now squarely in the driver’s seat – geopolitical jitters in the Mideast and supply disruptions simply don’t matter right now.

Brent fell into (another) bear market on Tuesday and the losses accelerated Wednesday. WTI slumped to a seven week-low. We’re now in the usual chicken-egg dynamic when it comes to oil and breakevens.

The bottom line is that if an all-out trade war between the US and China materializes, you can throw your demand forecasts out the window. That, in turn, means you can throw your price targets out as well.

Don’t let it be lost on you that Wednesday’s ~5.5% (as of noon) slide in WTI comes just days after the worst one-day collapse since 2015.

This is almost surely being exacerbated by the same negative gamma effects that hit last week (and which contributed to the November plunge, by the way).

(Goldman)

Remember, this could go from bearish to “uber-bearish” in the event China decides to indirectly retaliate to US trade pressure by ignoring the Trump administration’s ban on Iranian oil imports.

“A Chinese decision to reinitiate Iran crude purchases could send oil prices into a tailspin”, BofA’s Francisco Blanch wrote last week. “In the extreme, a combination of weaker demand (0.25 to 0.5mn b/d) and the return of up to 1.5mn b/d of Iran oil would weaken our projected global oil supply and demand balances between 0.5 to 2mn b/d”.

Read more: The Stars May Have Aligned For One Bank’s ‘Uber-Bearish, Extreme’ Oil Scenario