By The global oil market resembled a pendulum this week, swinging from multi-year lows to a tentative recovery as traders grappled with conflicting signals about the world economy’s health. Tuesday’s 1% gain provided little comfort to energy investors still rattled by the prospect of an escalating U.S.-China trade war.
Anatomy of a Rebound
Technical factors behind Tuesday’s recovery:
- Short-covering by hedge funds (net long positions had hit 11-month low)
- Bargain hunting at key psychological support levels (60 WTI, 65 Brent)
- Calendar spread tightening (July-August WTI spread narrowed to -$0.35)
However, the rally lacked conviction:
- Trading volumes 18% below 30-day average
- Open interest continues declining (down 7% month-to-date)
- Implied volatility remains elevated at 42%
Sector-Specific Impacts
The tariff threat creates uneven consequences across energy subsectors:
Refiners:
- Crack spreads weakening globally
- U.S. Gulf Coast 3-2-1 spread at 18.50, down from 24 in April
- Asian complex margins turn negative for first time since 2022
Drillers:
- U.S. rig count drops by 12 last week (Baker Hughes)
- Frac spread count in Permian down 15% month-on-month
- Schlumberger warns of “capital discipline tsunami”
Tankers:
- VLCC rates spike 22% as traders front-run potential disruptions
- Floating storage builds in Singapore (5.8 million barrels added)
The China Factor
Beijing’s response could prove decisive:
- Strategic Petroleum Reserve purchases slowing
- Independent refiners’ import quotas tightening
- Potential diesel export flood to offset tariffs
“China holds the wildcard,” noted Energy Aspects’ Yuntao Liu. “If they weaponize energy trade, all bets are off.”