Oil prices fluctuate amid recession fears

Worries over crude demand as US Federal Reserve indicates latest interest rate increase could be last

Oil futures posted two consecutive weekly declines before this week as a banking crisis in the US rattled financial markets. Getty

Oil prices fluctuated on Thursday after dropping nearly 9 per cent over the past three days as a regional banking crisis in the US rattled markets and raised concerns about a recession, which could lower crude demand.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.94 per cent higher at $73.01 a barrel at 9.52pm UAE time on Thursday. West Texas Intermediate, the gauge that tracks US crude, was up 0.71 per cent at $69.09 a barrel.

Brent settled 3.97 per cent lower at $72.33, while WTI fell by 4.27 per cent to $68.60 at market close on Wednesday.

"Bearish macro angst is trumping bullish micro fundamentals, with WTI crude oil plunging below its key resistance level of $70 a barrel," said Ehsan Khoman, head of emerging markets research for Europe, the Middle East and Africa at MUFG Bank.

"There is little in the way of fresh fundamentals to justify the sell-off, though investors seem to be getting increasingly nervous about the macro outlook and its implications for oil demand," he said.

"An acute drop in crude open interest in recent trading sessions suggests the price plunge is being driven by long liquidation than short additions. The key question now is where is the floor for the oil market."

The US Federal Reserve raised interest rates by 25 basis points, its tenth consecutive increase, and indicated a possible pause in future meetings.

The latest action brings the Fed's interest rates to the target range of between 5 per cent and 5.25 per cent.

“The end of the Fed’s hiking cycle is here as policymakers become more worried about economic activity,” said Edward Moya, senior market analyst at Oanda.

“If the Fed is worried, that is bad news for the economy and the crude demand outlook.”

Oil futures posted two consecutive weekly declines before this week as a crisis at regional banks in the US led to the collapse of First Republic Bank, the second-largest failure in the US since the 2008 global financial crisis.

The US has had three other failures this year — Silicon Valley Bank, Signature Bank and cryptocurrency-focused lender Silvergate Capital.

The financial turmoil has raised concerns about credit conditions in the country, which are expected to deteriorate for consumers and businesses over the coming six months to their worst level since the Covid-19 pandemic, a survey of chief economists at 15 of America's biggest banks showed last month.

The American Bankers Association said its Credit Conditions Index fell to 5.8 in the second quarter, from 12.5 in the first quarter. A reading below 50 indicates that economists forecast weaker credit conditions in the coming six months.

Meanwhile, manufacturing activity in China, the world’s second largest economy and top crude importer, contracted in April amid lower domestic demand.

The Caixin manufacturing purchasing managers' index, which gives a snapshot of the country’s manufacturing sector, slipped to 49.5 in April from 50.0 in March. A reading below 50 suggests contraction in the sector.

“The focus will shift to Opec+ and they might be in a position where if they want to stabilise prices, they need to deliver on previously announced production cuts and signal that more are coming,” said Mr Moya.

On April 2, Opec+ producers announced voluntary output cuts of 1.16 million barrels per day to ensure oil market stability. Brent, which crossed $85 a barrel following the group’s decision, has since lost nearly 15 per cent of its value on a weakening global crude demand outlook.

Opec+ will assess the current decline in oil prices, which may be short term, Russian Deputy Prime Minister Alexander Novak told state news agency Tass on Wednesday.

“We will watch the market. We will monitor the situation. We need to understand the reasons [for the drop in oil prices], the prospects for how [the situation] will evolve further, maybe this is a short-term situation,” Mr Novak was quoted as saying.

US crude inventories, an indicator of fuel demand in the country, fell by 1.3 million barrels last week, according to the US Energy Information Administration.

Distillate fuel inventories decreased by 1.2 million barrels, but gasoline stocks rose by 1.7 million barrels in the week ending on April 28, the EIA data showed.

Despite the market volatility, UBS said it is retaining a positive outlook and expects the oil market to tighten as Opec+ members implement their production cuts and oil demand rises over the coming months.

"Flight activity has rebounded strongly this year, with activity around 2019 levels. Generally, we see oil demand holding up and look for even higher demand over the coming months," UBS strategist Giovanni Staunovo said in a research note on Thursday.

"On the supply side, voluntary production cuts were implemented at the start of this month. The lower potential Opec+ crude production and exports should help the oil market tighten, supporting our view that oil inventories will begin to decline and support prices."