Energy firms led a sell-off in most Asian equity markets on Tuesday while confidence remains fragile owing to ongoing fears of a global trade war.
After hitting three-and-a-half-year highs at the start of the month, crude has dropped almost 10 percent as it is hit by a perfect storm of issues that have fuelled fears of a glut.
Brent crude recovered in Asian trade Tuesday after plunging more than 4 percent to three-month lows on concerns over increased production and reports the US could tap into strategic reserves.
The black gold had closed decisively lower in New York on worries of excess supply, with reports that Saudi Arabia is looking to increase production.
Speculation that US President Donald Trump could seek increased production from oil cartel OPEC and tap into the Strategic Petroleum Reserves to push down gasoline prices, sent oil plummeting.
Both Brent crude and US benchmark West Texas Intermediate fell more than 4 percent Monday, with the former hitting three-month lows of below $72 a barrel.
In early Asia trade Tuesday, WTI was back up 3 cents to $68.09 and Brent crude was up 45 cents to $72.29.
After withdrawing from the Iran nuclear deal in May, the US said it would reinstate sanctions on the oil-producing nation, and warned other countries to stop purchasing Iranian exports including crude.
“The big news… was that US Treasury Secretary Steve Mnuchin said the US wants everyone to go to zero Iranian imports but that exemptions could be made for those who can’t get there by the deadline,” said AxiTrader chief market strategist Greg McKenna in a note to clients.
Following a massive global supply glut, prices had been propped up in recent months by a production cap agreement led by oil cartel OPEC and Russia, but this has since been scaled back.
Traders will now be looking towards data from industry group the American Petroleum Institute, due later Tuesday, for an indication of US crude stockpiles.
“The sweeping slew of bearish signals has wholly eroded market sentiment,” said OANDA head of Asia-Pacific trading Stephen Innes.
Worries about the impact on demand caused by a possible trade war between the US and China took their toll last week, as did news that Libya was exporting again after recent oil field closures. That all came just weeks after major producers Saudi Arabia, Russia and OPEC agreed to lift a 2016 ceiling that had supported prices.
The latest spark for selling came Monday on reports the US may tap its Strategic Petroleum Reserve to lower prices and speculation Riyadh was considering increasing output for some Asian countries.
Also Monday US Treasury secretary Steven Mnuchin indicated the Trump administration could allow some exceptions to a ban on purchases of Iranian oil.
“It very much seems like a continued reaction to potential supply increases,” Bart Melek, head of global commodity strategy at TD Securities in Toronto, told Bloomberg News.
“The combination of the supply-side effect and the potential for less demand as a result of trade woes that we’re seeing are prompting people to take some of the long bets off oil right now.”
Both main contracts tumbled more than four percent Monday, though they saw some minor increases in Asia.
– IMF trade warning –
The losses filtered through to energy firms with CNOOC and PetroChina down more than three percent in Hong Kong, while Woodside Petroleum was more than two percent off in Sydney and Tokyo-listed Inpex lost more than one percent.
Broader stock markets were also mostly down with Hong Kong 1.1 percent lower, Shanghai one percent off and Sydney 0.4 percent lower. There were also losses for Seoul, Wellington, Taipei and Singapore.
However, Tokyo — which was closed for a holiday Monday — rose 0.6 percent by the break thanks to a weaker yen.
Ongoing fears about a China-US trade war continue to nag investors, with both sides filing counter-complaints at the World Trade Organization after recently imposing and threatening further tariffs on billions of dollars worth of goods.
And on Monday the International Monetary Fund warned about the effects of a stand-off between the world’s two economic superpowers.
“The risk that current trade tensions escalate further — with adverse effects on confidence, asset prices, and investment — is the greatest near-term threat to global growth,” IMF chief economist Maurice Obstfeld said.
Attention is now on the start of the corporate earnings season, with hopes strong reports will deflect from the trade war, while Federal Reserve chief Jerome Powell is to give two days of congressional testimony from Tuesday.