Oil price dives toward $50

Oil demand is shriveling as the trade war between the U.S. and China trips up the global economy.

Estimates for March and April are pointing to year-on-year declines in regions that account for almost half of global oil demand, according to Morgan Stanley. Indicators including the profit from making plastics have been sinking while refining margins in Europe recently hit multiyear lows.

Even support from one of the tightest physical markets in years is starting to weaken – premiums refineries pay to procure immediate supplies are slumping. That’s despite output being hit by a combination of OPEC+ production cuts, U.S. sanctions on major producers Iran and Venezuela, and an unprecedented halt to Russia’s giant Druzhba crude pipeline. Analysts are now taking increasingly bearish views on consumption for this year.

“Demand expectations for 2019 have so far been unrealistic,” said Mark Maclean, managing director at Commodities Trading Corp. in London, which advises on hedging strategies. “China has slowed faster than people expected and the trade war is still having a significant impact, the EU will not be a pocket for demand growth this year and the U.S. is also problematic.”

Oil isn’t alone in showing weakness. While stocks have so far shown resilience in the face of the trade war, other parts of the global financial market betray investor fears. Government bonds have been on a tear, with the yield on 10-year U.S. Treasuries falling more than a percentage point since a November peak as traders seek out safer assets.

Other established havens have enjoyed similar demand, and gold touched the highest since April 2018 last week while the Japanese yen is near the strongest this year.

Concerns about oil demand are also filtering through to policy-makers in producing nations. This week both Saudi Arabia and Russia addressed concerns that weaker consumption has the potential to send crude prices below $40 a barrel if OPEC and its allies don’t persevere with output cuts. West Texas Intermediate traded at around $52 on Wednesday, having slumped into a bear market last week.

Though the International Energy Agency expects oil consumption to grow by 1.3 million barrels a day this year, Wall Street has been turning more pessimistic. Morgan Stanley said it expects growth of 1 million barrels a day, while JPMorgan Chase & Co. sees 800,000 barrels a day. That which would be the lowest growth rate since 2011. If demand grows by less than 600,000 barrels a day this year, it would be the weakest since 2009, according to IEA data.

The outlook has been darkened particularly by concerns around the trade war between the U.S. and China. Global trade growth is set to slow for a second year, to 3.4% in 2019, according to the International Monetary Fund, and that easing will continue to crimp oil demand, said Caroline Bain, chief commodities economist at researcher Capital Economics in London.

“We’ve had quite a slowdown in world trade, and we’re not expecting it to pick up, which is negative for oil demand,” said Bain, who sees oil demand growing by 900,000 barrels a day this year.

Demand weakness will be reflected most starkly in diesel-like products such as gasoil, said Steve Sawyer, an analyst at consultancy Facts Global Energy in London. In recent weeks, the structure of that market has weakened significantly for the rest of 2019, suggesting growing expectations of oversupply.

There’s still cause for hope. Demand for jet fuel should remain robust as air travel continues to expand, Sawyer said. Meanwhile, new rules curbing the amount of sulfur that ships are allowed to emit are set to provide a much-needed boost to oil demand toward the end of the year.

But lighter products are still providing a cause for concern. Producing naphtha — which can be used to make gasoline or plastics — is the least profitable in Europe for the time of year since 2012. In Asia, profits from churning out the product tumbled in recent weeks. The weakness in those regions has started to chip away at the profitability of refining crude in some parts of the world.

“Demand has been particularly weak in Asia,” said Olivier Jakob, managing director at consultant Petromatrix GmbH in Zug, Switzerland. “The growth needs to come from there and right now it’s not.”

Price index trails forecasts, raises hopes of Fed interest-rate cut

A closely watched measure of U.S. inflation trailed forecasts in May, reinforcing the case among investors for the Federal Reserve to cut interest rates.

The core consumer price index, which removes energy and food costs, rose 2% from a year earlier, according to a Labor Department report Wednesday. Economists surveyed by Bloomberg had predicted a 2.1% increase. Monthly core price-rises, as well as a wider measure of annual inflation, also came in below estimates.

Stocks declined on the report, which follows other signs of slowing economic growth at home and abroad — as well as uncertainty over the impact of President Donald Trump’s tariffs on Chinese goods — that have bolstered expectations for Fed rate cuts this year. The market-implied odds of a July cut increased, with Fed funds futures now indicating almost a quarter-point of easing in the next two months.

The CPI numbers show “there are limited inflation pressures in the U.S. economy right now,” said Leslie Preston, senior economist at Toronto-Dominion Bank. “It gets harder and harder to dismiss the benign inflation on any one factor or any month-to month swing.”

Core prices rose 0.1% from the previous month for a fourth straight time, missing estimates of a 0.2% gain. The broader CPI increased an annual 1.8%, less than projected.

A sharp drop in used-car prices helped drive the monthly change, while cheaper gasoline played a role in keeping broader inflation tame. Energy prices fell 0.6% from the prior month and 0.5% from a year earlier as all major components in the category fell on an annual basis.

Apparel prices were unchanged after two steep declines. Readings have trended lower after the Commerce Department changed its data collection methodology.

At the same time, inflation is showing signs of firming by another measure that the Fed prefers. That core price gauge — linked to spending and excluding food and energy — firmed in April for the first time this year, though remained below the Fed’s 2% target. It tends to run slightly below the Labor Department’s CPI.

Powell, in a speech last week, opened the door to interest-rate cuts after holding in May that below-target inflation was due to transitory factors. Bond-market investors expect the central bank to lower rates as it tries to brace the economy for slowing global growth, lower corporate spending and a weaker consumer outlook.

Grounded 737 Max expected to be flying by December

Boeing’s 737 Max aircraft, grounded since March after two fatal crashes in five months, should be back in the air by December, a top U.S. regulator said.

It’s not possible to give an exact date as work progresses on safety fixes to the aircraft, Ali Bahrami, the Federal Aviation Administration’s associate administrator for aviation safety, said in an interview Wednesday at a conference in Cologne, Germany.

While the FAA is “under a lot of pressure,” he said the Max will be returned to service “when we believe it will be safe,” following reviews of the design, flight testing and other checks. Bahrami was reluctant to provide a timeline, but asked whether the plane would resume service this year or next, he said remarks by Boeing Chief Executive Officer Dennis Muilenburg projecting a return by the end of 2019 sounded correct.

Knowing when the latest version of the 737 will fly again would help airlines contend with the disruption caused by the grounding of the narrow-body, Boeing’s most popular model. The FAA has said that there’s no time frame to sign off on Boeing’s proposed fix for the jet.

Muilenburg said last week on CNBC that he expected that the Max would be back in the air by year-end.

American Airlines Group has kept the plane off its schedule through Sept. 3, while Southwest Airlines and United Continental Holdings are looking at resuming Max flights in early August.

Boeing is finalizing a software fix for a flight-control system malfunction linked to the accidents involving Lion Air and Ethiopian Airlines, as well as proposed new pilot training. A combined 346 people were killed in the crashes five months apart.

The FAA isn’t the only regulator that holds sway over returning the Max to the skies. The European Aviation Safety Agency also is examining Boeing’s changes, a process that won’t conclude until the end of July at the earliest, Director Patrick Ky said in a separate interview. The agency is considering whether to require additional simulator training for flying the Max, as well as potential design changes, he said.

Boeing has cut its production rate for the model by 10 planes a month to 42. The company had earlier aimed to increase output to 57 monthly in the second half of the year.

The Chicago-based planemaker faces an estimated $1.4 billion bill for canceled flights and lost operating profit at airlines if the Max is still grounded by the end of September, said Bloomberg Intelligence analyst George Ferguson.

Through Tuesday, the stock had dropped 18% since the Ethiopian Airlines crash in March.

Venezuela to print larger-denomination banknotes

CARACAS, Venezuela — Venezuela is planning to introduce banknotes with larger denominations to cope with hyperinflation which shows no signs of slowing.

The central bank says the new bolivar bills of 10,000, 20,000 and 50,000 will gradually start to circulate on Thursday as a way to make payments and transactions “more efficient.”

The biggest new bill is about the equivalent of $10, which is more than the monthly minimum wage in a country whose economy has been shrinking drastically for years. Until now, the biggest denomination was the 500-bolivar note.

Debit cards are a common form of payment in Venezuela, where the currency is worth so little that big piles of already scarce cash are needed for even relatively small transactions.

– From news service reports