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Is Oil Getting Riskier?

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US crude oil near 2019 high

On April 3, US crude oil May futures declined just 0.2% and closed at $62.46 per barrel. However, on the previous day, US crude oil active futures closed at $62.58, their highest closing level since November 5. Factors such as OPEC cuts, falls in US monthly oil production, and the rise in the S&P 500 Index (SPY) have supported oil prices. But, with the recent macro events, oil is getting riskier at those levels.

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Is oil getting riskier?

On March 22, the US ten-year Treasury constant maturity minus three-month Treasury constant maturity yield spread fell just below zero for the first time since August 8, 2007. The inversion of the yield curve could signal a recession. Moreover, on April 1, advance estimates of US retail sales suggest a fall of 0.2% in February on a month-over-month basis, showing signs of a slowdown in the US economy. Europe’s largest economy, Germany, is already experiencing a slowdown.

Moreover, this year, US short-term interest rates and the S&P 500 Index (SPY) have diverged, according to a CME report. Market participants are concerned that the diversion in the bond and equity markets might be a negative for oil prices. If the equity market declines, it will likely drag oil prices. Oil is a growth-driven asset.

Upstream stocks such as Chesapeake Energy (CHK), Concho Resources (CXO), Apache (APA), and others will likely be impacted by any fall in oil prices.

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