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Haley Zaremba

Haley Zaremba

Haley Zaremba is a writer and journalist based in Mexico City. She has extensive experience writing and editing environmental features, travel pieces, local news in the…

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The Worst Is Still To Come In Energy Markets

It’s been a rough week for the stock market across the board, but there is one sector that’s hurting more than all the rest. The only sector currently in a bear market is the energy sector, which fell more than 6 percent at the beginning of the month, making it the number-one worst performer on the S&P 500 Index.

While this already seems like a worst-case scenario for investors, some analysts say that things are actually going to continue to get worse for global energy markets. One major factor at least partially causing the downturn is a recent escalation of the now more-than yearlong trade war between the United States and China, which heated up to new levels last week when United States President Donald Trump tweeted that he would be imposing a further 10 percent tariff on a further $300 billion of Chinese goods starting on September first. 

China quickly retaliated, predictably following the tit-for-that model that the both sides of trade war have followed since its beginning last year, by allowing its tightly controlled currency to drop to its lowest value in over a decade, exacerbating trade tensions between the two countries by making Chinese goods less expensive for U.S. markets and, conversely, making U.S. goods more prohibitively expensive for Chinese consumers. In an article about this week’s worsening tensions between the United States and China, Forbes pointed out that “the U.S. Treasury has since officially labeled China a ‘Currency Manipulator’ – an action it has not taken since the 1990s when China was also named.” Related: Energy Storage Boom Goes Into Overdrive

“The U.S.-China trade war has always been serious. Now it's starting to get scary,” CNN Business reported, mincing no words about the precariousness of the U.S. market going forward.

One of the numerous immediate effects of the worsening relations between the United States and China was the deflated price of crude oil, which made waves throughout the whole energy trade sector. Just after Trump’s Thursday tweets announcing September 1st’s newly escalated tariffs against China, oil prices immediately dropped by 8 percent “with the stocks of oil producers also plummeting, some by more than 10 percent” in what was “the largest single-day drop in oil prices in the past three years” according to a report from Forbes.

And the surf is only going to get rougher going forward. Speaking to CNBC on Mondays edition of “Trading Nation,” head of technical analysis at worldwide brokerage and investment bank Oppenheimer Ari Wald said, “it’s a bearish trend and a poor risk-reward. [...] The sector has just not been rewarded when oil rises to the same degree it’s been slammed when oil falls.” CNBC uses West Texas crude to exemplify this trend, pointing out that the region’s crude oil “has surged more than 110 percent since bottoming in 2016. Over that period, the XLE energy ETF has added just 19 percent.” Related: Big Oil Profits Lag Despite Rising Production

Oppenheimer’s Wald went on to say that the sector’s largest stock Exxon Mobile is also projected to continue a downward trend, in a turn of events that is sure to have a negative impact on the energy sector as a whole. “Exxon Mobil [is] turning lower from the bearish slope of its 200-day moving average. We define that as a resumption of the downtrend,” said Wald. “When you’ve got the biggest stock in the sector acting as that headwind in what is a broad list of bearish trends in this sector, we recommend underweight, avoiding, stay away from energy,” he went on to tell CNBC.

As of Tuesday, crude was at a six-week low with Bank of America agreeing with forecasts that the oil and energy markets are only going to get worse before they get better, “warning that $30 per barrel could be over the horizon following China’s tough stance on sanctions,” according to CNBC. The report went on to underscore, soberingly, that “these are recessionary prices, if they occur.”

By Haley Zaremba for Oilprice.com

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