Oil drops closer to US$100 as recession fears rattle market

OIL plunged more than 6 per cent for the second time in less than a week as concerns grow that a global economic slowdown will ultimately hobble demand. 

West Texas Intermediate futures tumbled as much as 8.2 per cent to trade below SU$102 a barrel. Investors are worried about the impact of sharply higher US interest rates, with Federal Reserve Chair Jerome Powell testifying before Congress on Wednesday on his bid to curb the fastest pace of inflation in decades. 

Crude continues to plummet as the Fed’s commitment to taming inflation “has shaken the confidence of investors using crude as an inflation hedge,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “Market liquidity is challenged as volatility has also taken its toll on traders and investors alike, leaving crude susceptible to massive swings.”

Oil’s price spike since Russia’s invasion of Ukraine in late February caused a liquidity crisis in the oil market as investors are required to put down more cash to cover their trades. Futures holdings are at the lowest since 2016, leaving headline prices prone to outsized swings. WTI fell below its 100-day moving average early on Wednesday for the first time since January, adding technical pressure to an already fragile market.

Still, despite crude oil’s sharp moves, refined-fuel markets have remained robust. US President Joe Biden will call for a gasoline tax holiday this afternoon, a person familiar with the plan said, after the average US retail price topped US$5 a gallon this month following a surge of more than 50 per cent in 2022.

Wednesday’s slide comes alongside other commodities also losing ground, as well as some risk assets. Copper and iron ore declined, as did equities. An additional headwind for crude prices came from a rising dollar, which makes imports more costly for holders of other currencies. Citigroup said that it expects further declines in oil into the end of the year, but added that it’s set to be a volatile downtrend. 

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“Investors should remember that Fed-induced slowdowns are simply a short-term abatement of the symptom - inflation - and not a cure for the problem - underinvestment,” Goldman Sachs Group said in a note.  BLOOMBERG