Oil Down 2% as Wall Street Tumbles on China Contagion Worry

© Reuters.

By Barani Krishnan

AiVIF.com - Global oil markets tumbled as much as 2% Monday as Wall Street cratered amid worries about a China debt crisis that triggered a flight to safety among investors.

Further weighing on crude were signs that U.S. oil production was also returning from a three-week clampdown on output forced by end-August Hurricane Ida.

New York-traded West Texas Intermediate, the benchmark for U.S. oil, settled down $1.68, or 2.3%, at $70.29 per barrel. 

London-traded Brent crude, the global benchmark for oil, finished the session down $1.42, or 1.9%, at $73.92.

Wall Street’s three main stock indexes — the Dow, S&P 500 and Nasdaq — all fell about 2% or more. Nasdaq, the tech sector bellwether, was on track to its worst loss in seven months. Even the yield on the U.S. 10-Year Treasury note —- which had rallied over the past week — plunged its most in nearly a week.

The Dollar Index was the only contrarian to the trend, rising to a four-week high.

Global markets plunged as a growing debt crisis at major Chinese property group Evergrande sparked concerns about spillover risks in the world’s second-largest economy.

“China has been doing lots of things over the past couple of months now to the extent they are messing with the economy there, and that could impact its demand for crude oil,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “They are the swing demand center, in the same way the Saudis are the swing producer. Everything turns on what China does. If we lose China, we’ll lose the oil rally.”

Adding to the bearish sentiment in oil were remarks over the weekend from China’s Premier Li, who said Beijing will use “market tools” to stabilise commodity prices. That appeared to be a coded message for the release of more oil and metals supplies from stockpiles versus pricey imports.

Since Friday, a dark mood had set in on risk markets after U.S. Treasury Secretary Janet Yellen reiterated her warning that America could fall into a new recession if Congress does not reach a deal soon to raise the country’s debt limit. In years past, raising the debt ceiling had been likened to a rubber stamp exercise. But in today’s politically divided United States, it has become a crisis in its own right.

To top the list of worries, the Federal Reserve’s FOMC, or Federal Open Market Committee, will begin on Tuesday a two-day meeting that will be keeping investors on tenterhooks.

For months, there has been speculation that the central bank will announce a taper of its $120 billion bond and assets buying program that had been in place since the Covid outbreak of March 2020. The Fed’s timeline for scaling back economic stimulus is important as it represents a first step towards an eventual hike in interest rates, which it has kept at near zero over the past 18 months.

The most powerful officials within the FOMC, including the Fed chairman, have done all they can to delay a pullback of the stimulus on the excuse that the COVID resurgence via the Delta variant.

This time too, the Fed may issue a wishy-washy statement on the taper, followed by more mixed messaging by Chairman Jay Powell on Wednesday. Pundits do not expect the Fed to make any announcement on the taper till November.

Yet, in a market already operating on excessive fear, it’s more likely for investors to err on the side of caution.

“Coming on a day where liquidity is lower … markets are nervous and the U.S. dollar (has) risen ahead of the FOMC, there is an outsized impact,” said Jeffrey Halley, who heads Asia Pacific research at online trading platform OANDA.

On Hurricane Ida-related outages, the Bureau of Safety and Environmental Enforcement reported that less than 19% of US Gulf oil production remained shut in versus last week’s levels of 25%.