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Is the Yield Spread Signaling Trouble for the Oil Market?

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Nov. 20 2020, Updated 4:16 p.m. ET

US crude oil

On September 17, US crude oil October futures fell just 0.1% and settled at $68.91 per barrel. However, in the last trading session, the Energy Select Sector SPDR ETF (XLE) rose 0.2%.

On September 17, the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) fell 0.6% and 0.4%, respectively. The small rise in energy stocks may have limited the downsides of these equity indexes.

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Oil and trade war

Between September 10 and September 17, US crude oil October futures rose 2%. On September 17, US crude oil prices rebounded from their intraday high of $69.72. On the same day, the United States announced that it would impose a tariff of 10% on $200 billion worth of Chinese goods and that the tariff would rise to 25% by the end of 2018.

Is the yield curve signaling trouble for the oil market?

On September 17, the spread between the US ten-year Treasury constant maturity and the three-month Treasury constant maturity was 84 basis points. On August 24, the yield spread fell to 73 basis points, its lowest level since January 17, 2008. Rising concerns about economic growth due to the trade war may be behind the contraction in the yield spread.

On the past three occasions during which the yield spread turned negative, recessions occurred within a year. For this reason, the contraction in the yield spread might be a concern for oil prices because it’s a growth-driven asset.

Important price levels

On the upside, this week, the closing level of $70.82 per barrel will likely be important for US crude oil prices. The 100-day moving average, which is almost at par with US crude oil’s last closing level, could be an important support level for US crude oil prices.

On September 17, US crude oil prices were 0.6%, 0.1%, and 5.1% higher than their 20-day, 50-day, and 200-day moving averages, respectively.

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