Oil prices slip on mounting recession fears and rising interest rates

The central banks of the US, Europe and the UK raised borrowing rates by half a percentage point

A trader works on the floor of the New York Stock Exchange. Oil prices have slumped after rallying earlier in the week. AP
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Oil prices closed lower on Friday, after rallying earlier in the week, as central banks raised interest rates, recession fears increased and uncertainty lingered over a rebound in demand from China.

Brent, the benchmark for two thirds of the world’s oil, ended trading 2.67 per cent lower to settle at $79.04 a barrel while West Texas Intermediate, the gauge that tracks US crude, was down 2.39 per cent to $74.29 a barrel.

Oil prices rallied earlier this week amid reports that China, the world's biggest importer of crude, had eased its zero-Covid restrictions. However, the “stop-start” reopening of its economy stoked market volatility and uncertainty regarding the demand outlook.

"Crude prices are declining as recession fears grow and over uncertainty on how smooth China’s reopening will be given the surge in Covid cases they are experiencing," said Edward Moya, a senior market analyst at Oanda.

"The short-term crude demand outlook is a big question mark as China might struggle to ease covid curbs all the way and as global manufacturing activity widely remains in contraction territory.

"Oil might struggle to rally unless we see a disruption with crude supplies as energy traders fixate over deteriorating growth outlooks globally."

Brent settled 2.5 per cent higher at $82.70 a barrel on Wednesday despite the US Federal Reserve raising its interest rates by 50 basis points, the seventh increase of 2022. The US regulator also signalled more rate increases are expected next year.

“We share the view that the economy is well placed to digest the tighter monetary policy. At the same time, we think that further monetary policy tightening is unnecessary and would be a policy mistake,” said David Kohl, chief economist at Julius Baer.

On Thursday, the Bank of England and the European Central Bank also raised interest rates by half a percentage point each to reduce inflation, which is at its highest in decades.

“The size of the [ECB] hike was in line with both our and consensus expectations but forward guidance was much more hawkish than market expectations,” said Abu Dhabi Commercial Bank economists in a research note on Friday.

The BoE's “forward guidance highlights a meeting-by-meeting approach and also reiterated [its] willingness to 'respond forcefully, as necessary'. The overall tone of the meeting was relatively dovish compared to previous meetings”, ADCB said.

Earlier this week, the International Energy Agency raised its global oil demand growth estimate for this year and the next on rising crude consumption in India, China and the Middle East.

The Paris-based agency said it expects oil demand to grow by 1.7 million barrels per day in 2023, up from its previous estimate of 1.6 million bpd.

Oil demand will grow by 2.3 million bpd this year, a 140,000 bpd increase over the agency’s previous forecast.

Separately, on Tuesday, Opec stuck to its oil demand growth forecast for this year and 2023.

The oil producers' group now expects the world economy to grow 2.8 per cent this year, up from its previous estimate of a 2.7 per cent growth.

The 2023 global economic growth forecast was left unchanged at 2.5 per cent.

Updated: December 17, 2022, 8:04 AM