Oil extends decline as growth concerns stoke mammoth drop

OIL dropped below US$100 a barrel, with Goldman Sachs Group saying that a plunge driven by fears a recession will hurt demand was overdone.

West Texas Intermediate fell as much as 1.9 per cent to trade around US$98 a barrel. Brent crude fell over more than US$10 on Tuesday, its third-largest ever in dollar terms. Meanwhile, Citigroup’s Ed Morse said the outlook for oil demand will likely see further downward revisions amid higher fuel prices. 

While that drop was borne out of concern of a global recession and technical selling, there’s been little change to market fundamentals. Nearby Brent futures are trading at a giant premium to later months - indicating market strength - while disruption to global oil production has been mounting, amid a risk to Kazkahstan’s oil exports. 

“While the odds of a recession are indeed rising, it is premature for the oil market to be succumbing to such concerns,” Goldman Sachs analysts including Damien Courvalin said in a note. “The global economy is still growing, with the rise in oil demand this year set to significantly outperform GDP growth.”

Oil has opened the third quarter on volatile footing. With central banks including the Federal Reserve hiking interest rates to tame inflation, investors have been pricing in the consequences of a slowdown, even as physical crude markets continue to show signs of vigor and the war in Ukraine drags on.

A strengthening dollar has also been a headwind for commodities this week, as a gauge of the US currency rallied to the highest level in more than two years, with investors shying away from risk. A rising dollar makes raw materials like oil more expensive for holders of other currencies.

Tuesday’s selloff wasn’t just pressuring nearby prices - the entire futures curve slumped. Brent for December 2023 shed almost US$8 a barrel in the rout. 

Still, in China there are signs of rising demand as the world’s biggest importer emerges from virus lockdowns. Overall consumption of gasoline and diesel last month was at almost 90 per cent of June 2019 levels, according to people with knowledge of the energy industry.

“Prices will march higher once we get past this current bout of risk-off,” Wayne Gordon, commodity and Asia Pacific currency strategist at UBS Group AG Wealth Management, told Bloomberg TV. “We’ve seen a number of issues in North Africa, we’ve seen Opec potentially missing production targets. And when you look at even the demand side, it continues to remain robust if not improve.” BLOOMBERG



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