Oil prices clawed back some losses on Wednesday after falling sharply on Tuesday as fears of a global recession continued to mount.
Brent, the global benchmark for two thirds of the world's oil, was up 1.01 per cent at $103.81 a barrel at 10.20am on Wednesday, after falling by 9.5 per cent on Tuesday, its biggest daily drop since March.
West Texas Intermediate, the gauge that tracks US crude, was trading 0.53 per cent higher at $100.03 a barrel after dropping more than 8 per cent on Tuesday and closing below $100 for the first time since late April.
“The barrel of US crude took a decent dive yesterday, and broke the $100 psychological support as the recession fears weighed on demand prospects and shifted the market attention from too little supply to potentially too little demand,” said Ipek Ozkardeskaya, an analyst at Swissquote.
“Oil is slightly up this morning, near the $100 resistance, but the market rhetoric shifts from buying the dips to selling the tops. The next downside target is set at $93.”
While supply constraints continue to weigh on the oil market, supporting prices, concerns about an imminent recession have left investors on edge.
Recession concerns are growing amid mounting inflationary pressure, subsequent monetary policy tightening by central banks, the impact of the Covid-19 pandemic and geopolitical tension.
However, the price action overnight hints more at panic and forced liquidation, than a structural change in the tight supply-demand situation globally, said Jeffrey Halley, senior market analyst at Oanda.
“Although I acknowledge recession risks in the US, and Covid zero ones in China — the world’s two largest consumers — the futures markets in both Brent crude and WTI remain in heavy backwardation,” he said.
“That says that in the physical market, supplies remained as constrained as ever, and despite the noise seen overnight, oil prices may be in danger of overshooting to the downside.”
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The risk of a global recession is “rising sharply” amid a combination of “shocks”, including the impact of the Russia-Ukraine conflict on the eurozone, pandemic-related uncertainty in China and the sharp tightening in US financial conditions, the Institute of International Finance said in a report last week.
“The rapid slowdown in the US pushes our global growth forecast from near zero into outright contraction,” the IIF said.
Edward Bell, senior director responsible for market economics at Emirates NBD, said the threat a recession poses to oil demand was being priced forward even if, in reality, “oil demand shows a relative inelasticity to broader economic conditions and is able to better weather economic slowdowns”.
Oil prices have remained extremely volatile in the past few weeks, with concerns over the Russia-Ukraine conflict, Opec+’s decision to stick to its planned output increase in August and supply disruptions in Libya causing prices to remain on the upside.
G7 nations are currently considering a mechanism to cap the price fetched by Russian oil to increase pressure on Moscow in retaliation for its military offensive in Ukraine.
However, Russia can afford to cut crude production by 5 million barrels per day without excessively damaging its economy, JP Morgan analysts wrote in a note to clients last week.
“The most obvious and likely risk with a price cap is that Russia might choose not to participate and, instead, retaliate by reducing exports,” the analysts wrote.
A 3 million bpd cut to daily supplies would push crude prices to $190 while the worst-case scenario of 5 million bpd could lead to prices touching a “stratospheric” $380 a barrel, they said.
Last month, Suhail Al Mazrouei, Minister of Energy and Infrastructure, also said that oil prices could go higher as Chinese demand is expected to recover significantly at a time when efforts by Opec+ to raise production are not yielding results fast enough.
The latest data showed Opec+ was running 2.6 million bpd short of its production target, Mr Al Mazrouei said.
On Thursday, Opec+ agreed to increase production in August by 648,000 bpd, endorsing a plan announced earlier in June.
Looking ahead, oil markets could be in for a bumpy ride in the short term, said Louise Dickson, a senior analyst at Rystad Energy.
“The supply-side pressure, in particular from outages in Libya, Ecuador and Nigeria, is not balancing out an ever-resilient Russia, which has shaken off the taboo in selling oil, with heavy discounts opening up new markets and bringing crude oil production closer and closer to pre-invasion volumes of 10 million bpd,” she said.
“Today’s market moves reflect what oil traders believe the market conditions will be in September, which could be weighed down by not only a seasonal demand slump but weaker consumer demand overall.”
If a recession materialises and inflation continues to push prices for almost everything higher, oil demand is almost certain to fall, bringing down prices with it, Ms Dickson said.
“With Russian oil supplies set to drop as the year progresses and it runs out of western parts to maintain fields, and with the rest of Opec … uninvested in maintaining production capacity, I fear the days of $100 oil will be with us for some time yet,” said Mr Halley.
“That said, Brent crude and WTI are likely moving into a new $95 to $110 barrel range.”
