Oil prices gave up overnight gains to slump on Wednesday as fears of an impending recession in the US and its impact on global economic momentum amid rising inflation outweighed supply concerns.
Brent, the global benchmark for two thirds of the world's oil, fell by 4.03 per cent to $110 a barrel at 12.33pm UAE time. West Texas Intermediate, the gauge that tracks US crude, slumped 4.52 per cent to $104.60 a barrel.
Oil is headed for a monthly loss after tumbling last week following the US Federal Reserve's move to increase its policy rate by a larger-than-expected three quarters of a percentage point.
It was the third interest rate rise in three months and the biggest since 1994.
Fed chairman Jerome Powell has said more rate increase are on the cards to curb inflation, which hit a new four-decade high in May.
However, the pace of the rate increases has stoked fears of a recession in the world's biggest economy that could further slow global economic growth.
Mr Powell is expected to give his semi-annual evidence to politicians on Wednesday and he is expected to reinforce the Fed’s commitment to bring inflation down from 8.6 per cent to its 2 per cent target range.
“Anxiety ahead of the testimony of Fed chair Jerome Powell to the US Congress will weigh on the demand side, with much tighter policy [expected] to dampen consumer behaviour in coming months and quarters,” said Edward Bell, senior director of market economics at Emirates NBD.
A recession in the US could force the world economy to contract and significantly dent energy demand.
Economists and industry leaders — from Nouriel Roubini to Tesla chief executive Elon Musk — have warned of the growing likelihood that the US will fall into a recession.
Nomura Holdings expects a mild recession in the US by the end of 2022. The Japanese bank has warned of tightening financial conditions, souring consumer sentiment and worsening energy and food supply distortions that are clouding global growth outlook.
“A persistent fall in oil prices will hint that the global recession fears are taking the upper hand, and weigh heavier than the positive factors such as a tight supply, prospects of Chinese reopening and booming travel,” Ipek Ozkardeskaya, an analyst at Swissquote bank, said.
“We shall see a strong support near the 100-DMA [day moving average] level, around $106 per barrel, but the real test will be the $100 [per barrel] psychological level, if the fall continues,” she said of potential further declines in the price of the WTI benchmark.
Brent rose about 67 per cent last year as developed economies recovered from the coronavirus pandemic. It rose to a notch under $140 a barrel in March after Russia's military offensive in Ukraine, before giving up some gains.
Last week, Opec maintained its forecast that world oil demand would 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 oil exporters' group kept its oil demand forecast for this year at 3.36 million barrels per day, unchanged from the previous month's forecast.