Oil prices drop nearly 1% on fears recession may be looming

Singapore

OIL prices dropped by almost one per cent on Monday, with concerns recession could be looming outweighing supply disruptions from Opec's production cutbacks and from US sanctions on Iran and Venezuela.

In New York, oil steadied after its biggest loss in three weeks, yet concerns lingered that a slowdown in global economic growth will erode fuel consumption.

West Texas Intermediate futures were little changed near US$59 a barrel, after losing 1.6 per cent on Friday. A closely watched gauge of US Treasuries inverted for the first time since 2007, a signal a recession may be coming in the world's largest economy. Some concerns over a new crude glut abated however as drilling rigs in America fell to the lowest in almost a year.

Crude has retreated after reaching a four-month high on Thursday as disappointing global economic data and a lack of resolution to the US-China trade war dampened sentiment. The Organization of the Petroleum Exporting Countries and its allies' commitment to curb output, coupled with supply disruptions in Venezuela and Iran, is stopping prices from falling further.

"Dark clouds are looming over the global economy in ever-increasing numbers," said Stephen Brennock, an analyst at PVM Oil Associates Ltd in London. "Concerns surrounding an economic downturn reared their head last week amid a flurry of negative data."

WTI for May delivery lost 5 cents to US$58.99 a barrel on the New York Mercantile Exchange as at 10.12 am London time, after falling as much as 71 cents earlier. Prices declined 94 cents on Friday, paring the weekly gain to 52 cents, or 0.9 per cent.

Brent for May settlement dropped 15 cents to US$66.88 a barrel on the London-based ICE Futures Europe exchange. It fell more than 2 per cent over the previous two sessions. The global benchmark crude was at a premium of US$7.86 to WTI.

"The risk-off sentiment is pressuring commodity prices," said Kim Kwangrae, a commodities analyst at Samsung Futures Inc in Seoul. "Investors are worried about the potential for a long-term recession, and that's pushing down expectations for future demand."

European and Asian stocks tumbled on Monday after the gap between the three-month and 10-year US debt yields turned negative on Friday. The inversion came after an index of American manufacturing slowed, and factory output data from France and Germany was weaker-than-expected.

The number of US rigs dropped for a fifth week to the lowest level in almost a year, according to data released on Friday by Baker Hughes, easing concern over surging US production. Rigs targeting oil fell by nine to 824 last week, taking the drop so far this year to 53.

Adding to the fears of a more widespread global downturn, manufacturing output data from Germany, Europe's biggest economy, shrunk for the third straight month.

"Estimates for growth and earnings have been revised down materially across all major regions," said US bank Morgan Stanley.

ANZ bank said the darkening economic outlook "overshadowed the supply-side issues" the oil market was facing amid supply cuts led by producer club Opec as well as the US sanctions on Venezuela and Iran.

Opec and non-affiliated allies such as Russia, together referred to as "Opec+", have pledged to withhold around 1.2 million barrels per day (bpd) of oil supply this year to prop up markets, with Opec's de-facto leader seen to be pushing for a crude price of over US$70 per barrel. REUTERS, BLOOMBERG