Fears Of Economic Slowdown Cap Crude Prices

Hamilton Nwosa
Writer

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  • The oil market is currently very much focused on the bearish signals, with prices reflecting fears of slowdown in China, a slowdown or recession in the U.S., and a recession in Europe.
  • Global maritime trade is slowing down and freight rates are returning to more normal levels.
  • Fitch: The Eurozone and UK are now expected to enter recession later this year, while the U.S. will suffer a mild recession in mid-2023.
Oil prices have declined by around $30 a barrel since the recent peak in early June before the Fed and other central banks started aggressive interest rate hikes to fight runaway inflation.   The tightening monetary policy is expected to slow economic growth, while several financial market indicators suggest that the markets expect recessions, which could slow global oil demand growth.

The most closely watched major forecasters – OPEC, EIA, and the International Energy Agency (IEA) – continue to expect growth in global oil demand both this year and next, with demand outpacing pre-COVID levels in 2023.

Yet, the oil market is currently very much focused on the bearish signals, with prices reflecting fears of an economic slowdown in China, a recession in Europe’s major economies, and a slowdown or recession in the United States.

Several recent financial and trade indicators point to a slowdown, and the market is taking that as a cue for rising expectations of a recession at some point over the next few months.

Despite a solid job market in the U.S. and still a high level of economic activity, the financial markets – as seen in equity futures – point to higher chances of a major decline in the economic cycle, or a recession, over the next six months, Reuters’s senior market analyst John Kemp notes.

Then there is the falling open interest in oil futures as many investors have fled the market due to high volatility, thus exacerbating that volatility as liquidity drops.

In one of the most recent assessments, indicators point to a global maritime trade growth slowdown, in a sign that the economic slowdown is underway and a recession in major markets could soon materialize, threatening oil demand.

This week, the Drewry World Container Index fell below $5,000 per 40ft-foot container for the first time since April 2021—a strong signal of a “return to sanity” for freight rates, the provider of research and consulting services to the global maritime and shipping industry said. The composite index fell by 8% this week, the 29th consecutive weekly decrease, and has dropped by 52% when compared with the same week last year.

The Eurozone and UK are now expected to enter recession later this year, while the U.S. will suffer a mild recession in mid-2023, Fitch Ratings said this week, revising down its world GDP growth forecast to 2.4% in 2022, down by 0.5 percentage points from the June forecast. Global economic growth is now expected at just 1.7% in 2023, a cut of 1 percentage point.

“We’ve had something of a perfect storm for the global economy in recent months, with the gas crisis in Europe, a sharp acceleration in interest rate hikes and a deepening property slump in China,” said Brian Coulton, Chief Economist at Fitch.

The oil market is also apprehensive of the slowdown expected from continued interest rate hikes. The Fed has more work to do in taming inflation, and the key interest rate needs to move up to above 4% by early 2023 and stay there, Cleveland Federal Reserve Bank President Loretta Mester said at the end of last month. The Fed’s current target policy rate is in the 2.25%-2.5% range, after two consecutive hikes of 75 basis points, or 0.75%.

OPEC, however, remains upbeat on global economic growth, saying in its latest Monthly Oil Market Report (MOMR) that growth is set to remain robust at 3.1% this year and another 3.1% next year, in a forecast suggesting that the cartel expects healthy oil demand growth despite market fears of recession.

The IEA cut its global oil demand growth estimate by 110,000 bpd to 2 million bpd for 2022, as it expects China’s oil demand to fall for the first time in more than three decades due to the snap COVID lockdowns.

The IEA noted in its report this week that still resilient Russian supply could drop by 2.4 million bpd later this year and early next year when the EU embargo on Russian oil imports by sea kicks in.

Supply in the short term is as uncertain as demand is, according to oil broker PVM Oil

“The wild card in predicting oil balance might be the supply side of the oil equation but there is a tangible lack of consensus in foreseeing future oil demand, too. This makes forecasting close to impossible and no certainty is anticipated in the near future,” PVM said.  NB: Tsvetana Paraskova wrote this article for Oilprice.com

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