Oil stable as traders assess demand prospects amid recession fears

Pace at which the Fed is raising interest rates to stem inflation has stoked fears of a slowdown in the world's biggest economy

Pump jacks and a drilling rig at an oilfield in Texas. West Texas Intermediate, the gauge that tracks US crude, was down 0.34 per cent to $109.19 on Monday morning. Reuters

Oil prices stabilised on Monday as investors assessed demand prospects for crude against concerns of a potential recession following aggressive rate increases by the US Federal Reserve.

Brent, the benchmark for two thirds of the world's oil, steadied after a 5.58 per cent slump to its lowest level in four weeks on Friday. It was trading 0.58 per cent lower at $112.46 a barrel at 12.18pm UAE time.

West Texas Intermediate, the gauge that tracks US crude, was down 0.34 per cent to $109.19. The benchmark slumped 6.83 per cent on Friday.

Last week, the Fed raised its policy rate by a larger-than-expected three quarters of a percentage point. It was the third interest rate increase in three months and the biggest since 1994.

Fed chairman Jerome Powell on Friday said the rate increases will continue in order to curb inflation.

However, the pace at which the Fed is raising rates to bring inflation down from a four-decade high has stoked fears of a recession in the world's biggest economy, rattling global financial markets.

The US economy could fall into a mild recession by the end of 2022, economists at Nomura Holdings said on Monday.

The Japanese bank warned of tightening financial conditions, souring consumer sentiment and worsening energy and food supply distortions that are clouding global growth outlook.

“As such, falling demand due to a global economic slowdown is the most effective short-term solution to pause the oil rally,” said Ipek Ozkardeskaya, an analyst at Swissquote bank.

“US crude is below $110 per barrel this morning, which is perhaps the best news this Monday.”

The US government on Sunday urged oil refiners to find immediate solutions and increase efforts to boost supply.

While some producers, including Exxon, said they can use short-term solutions, they also urged the government to promote investment through clear and consistent policy support in the long term.

“The problem is, the US, as other countries, wants to move away from fossil fuel, which, in turn, makes investing in refining facilities — that has a payback period of around a decade — significantly less meaningful for oil companies,” Ms Ozkardeskaya said.

Demand for crude remains strong, with the outlook for oil prices stable as supply concerns continue to dominate the market, said Jeffrey Halley, senior market analyst for the Asia-Pacific region at Oanda.

“Chinese Customs reported record oil imports for May this morning, suggesting demand remains as strong as ever,” he said.

“That remains so around the world, and the squeeze on refined products like diesel and gasoline remains as tight as ever.”

However, Friday's declines have brought “six-month support lines back into focus”, Mr Halley said.

The Brent support line was at $107 a barrel on Monday, slightly below its 100-day moving average, while for WTI, it was at $106 a barrel, he said.

“It is hard to see either contract moving lower than $100 a barrel, given the state of the physical market,” Mr Halley said.

Brent, which rose about 67 per cent last year, has rallied about 45 per cent since the start of this year as developed economies recover from the coronavirus pandemic, and as Russia's military offensive in Ukraine continues into its fourth month and the EU presses forward with banning most Russian oil imports by the end of this year.

Last week, Opec maintained its forecast that world oil demand will exceed pre-pandemic levels in 2022, but said that the Russia-Ukraine war, developments related to the pandemic and inflationary pressures posed a considerable risk.

The crude oil exporters group kept its oil demand forecast for this year at 3.36 million bpd, unchanged from the previous month's forecast.