Oil suffered its third weekly loss on Friday as growing indications of a possible global recession battered the commodity, overshadowing any supply-risk concerns.
US benchmark West Texas Intermediate futures landed at $85.11, a 1.9% decline from the previous week. A hotter than expected CPI report created increased fears of more aggressive policy moves by the Federal Reserve, which in turn it is thought will put the brakes on economic growth. In addition a disastrous report by FedEx led to fears among investors the global economic slowdown was already beginning to manifest in a reduction of product-shipping.
Ed Moya, senior market analyst at Oanda said, “This was the week that energy traders started to believe that the US economy is headed for a rough patch. Global recession fears are becoming the consensus view and that is troubling for the short-term crude demand outlook.”
Still, analysts note there are continued risks of supply disruptions from Russia, and new numbers out of China show some recovery in production, which will increase demand going forward. Taken with OPEC’s recent aggressive moves to support prices, experts say $85 per barrel is probably a decent ground floor for the price per barrel going forward right now.
However many other factors threaten the demand outlook. The US Federal Reserve is growing increasingly hawkish as inflationary pressures begin to grow entrenched, sparking risks of its more aggressive monetary tightening pushing the economy into a recession. In Europe a severe energy crisis is set to drive massive inflation this winter, possibly driving many businesses out of business due to energy bills they will not be able to afford. China continues to adhere to its zero-Covid policies which see cities of millions locked down and all production halted due to handfuls of cases testing positive for the virus. In addition, diesel prices have slumped, and are seen by investors as tied to the global growth outlook, while several banks have been cautioning that the global outlook appears bleak.
From the monetary side, the Bloomberg dollar gauge rose to near a record this week, as it appeared the Federal Reserve was all but certain to impose a 100 basis point hike at the next FOMC meeting. As the dollar grows stronger, it requires fewer dollars to buy equivalent amounts of oil, which pushes the price down for those buying in dollars.
The outlook on Russian supply disruptions is somewhat unclear, and continues to provoke uncertainty. As Germany faces a massive energy crisis this winter due to Russia cutting off all gas flows through the Nord Stream 1 pipeline, the government seized a local unit of the Russian oil major Rosneft PJSC, which included stakes in three refineries.
One of the refineries, PCK Schwedt, is now bracing for retaliation from the Russian government, likely through curtailing crude oil supplied through the Druzhba pipeline.
