A volatile and turbulent ‘crude’ week is over. Oil prices that reached multi-year highs early in October have lost almost 40 per cent since, approaching their lowest levels in 18 months.

So volatile has been the week, that after soaring 8pc on Wednesday, crude markets dropped again, though by a smaller margin, on Thursday, before steadying on Friday. And the see-saw continues.

Interestingly, crude markets continued to drop, despite the announcement by the Organisation of Petroleum Exporting Countries (Opec) and its allies, to cut output by 1.2mbpd. A debate is now on: why has the decision to cut output failed to deliver?

A faltering global economy and the rising US supplies are the real cause of concern to the crude industry, most now agree. The sharp drop in oil prices reflects the fear that the global economy is in for a real downturn.

The International Monetary Fund now expects global economic growth to slow to 2.5pc next year from 2.9pc in 2018.

Reduced economic activity means less demand for energy products. The Opec is now projecting that the call on its oil in 2019 would be about 1mbpd less than in 2018.

The Paris-based International Energy Agency (IEA), the OECD energy watchdog, forecasts a “relatively weak” demand in Europe and developed Asian countries. It has also cautioned about demand “slowdown” in India, Brazil and Argentina.

Another risk to the state of the global economy is the possibility of the tit-for-tat tariffs between the US and China devolving into a full-blown trade war. This would impact the economic growth in China and that would carry a significant impact on the global energy markets.

Most of the crude demand growth in recent years has been coming from China and the rest of emerging Asia, while demand in the developed Western countries has been weak.

Analysts are concerned. The biggest threat to the oil market in 2019 emanates from China, underlines RBC Capital Markets. While China has been sopping up lots of crude, it has also been churning out huge volumes of refined products like gasoline. RBC is of the view that a glut of Chinese fuel could create contagion throughout the global oil market.

Helima Croft, global head of commodity strategy at RBC is also warning of emerging signs of the weakening global ‘crude’ demand growth. The continuing collapse in oil prices signals, investors are worried about a 2019 recession.

The US-Chinese trade tensions is also causing finance executives to lose faith in China’s economic growth, a Deloitte survey is stressing too.

Growing concerns about the health of the global economy, rumbling trade wars, the disruptive effect of Brexit, the Federal Reserve’s latest rate hike and the threat of a US government shutdown have all played their part in the slide, says Julian Lee of the Bloomberg.

Those wider concerns have undermined sentiment across asset classes and oil has been caught up in the rout. Slashing production may raise prices briefly, but the higher fuel costs will only add to the negative pressures on the wider economy, Lee points out.

“What’s happening in the stock market is raising fears that the economy is grinding to a halt and thereby will basically kill any future oil demand,” says Phil Flynn of Price Futures Group in Chicago.

“They’re pricing in a slowdown in the economy if not a recession with this drop.”

A period of economic contraction is very much on the horizon. If fears of a recession materialise, growth in the OECD is projected to shrink 0.1pc next year, whereas the world as a whole should see a 0.2pc drop through 2019 from 3.7pc to 3.5pc.

The industry is worried. Nearly half of chief financial officers now see a chance that a recession will hit by the end of 2019, a CNBC survey revealed. In a research note last week, Paul Sankey, lead oil analyst at Mizuho Securities, says: “Oil is weak because many demand signals are blinking red, and supply cuts won’t matter if the bottom falls out of demand.”

Besides warning shots about the state of the global economy, surging oil production from the United States is also a cause of concern. President Trump’s decisions over the past week are also throwing global equities and oil markets into tantrums.

The, almost unprecedented criticism of the Fed policy, with President Trump asserting that the Federal Reserve policy is the “only problem of our economy,” has also contributed to the crude slide.

The global economy is faced with real headwinds and, that is spooking the crude markets.

Published in Dawn, December 30th, 2018