There are signs of slowing economic growth, which could reduce oil demand. But oil market participants and analysts are struggling to estimate how much demand could suffer in a downturn that will bear no resemblance to the credit collapse and crisis of 2008/2009. Bearish factors dominate the current market sentiment, but some analysts say paper traders may have already priced in too much recession fear. At the same time, the US labor market is beating expectations, defying other gloomy signals that America’s economy is slowing. In addition, annual US inflation in July eased from the previous month due to lower gasoline prices. Still, bearish sentiment is currently prevailing in the oil market as participants pay more attention to recession fears, steady Russian oil exports against early expectations of massive losses in the region of 3 million bpd and weaker Chinese factory activity and the sudden COVID-related lockdowns that are weighing on fuel demand. Upcoming bullish signals include hurricane season in the United States this month and next, where strong storms and hurricanes could force the shutdown of Gulf of Mexico production platforms or the precautionary shutdown of refineries along the Gulf Coast. Another year-end bullish factor could come from the end of US SPR issuances, currently expected to end in October. At the same time, US oil producers are not ramping up output too much – even at $100 oil – due to continued capital discipline, supply chain constraints and cost inflation. The full effect of the EU’s ban on imports of Russian marine oil, expected to start at the end of the year, is also difficult to assess, as is the impact of a possible price cap on Russian oil, which would allow insurance and other services for Russia’s crude oil if buyers commit to buy it at or below a certain price. Recession fears The oil market, however, is currently reeling from concerns about a global recession and demand destruction. Recession fears in Europe have intensified amid soaring energy prices and a low supply of natural gas from a Russian pipeline that is forcing companies in some energy-intensive industries to cut output. In the UK, the Bank of England warned last week that the country is expected to enter a recession from the fourth quarter of this year, which will last until the end of 2023. Net short positions – the difference between up and down bets – on Brent and WTI had fallen to a very low level since early August on fears of a recession and slowing global economic growth, bank SEB said in a research note earlier this year. week. The natural crude market is also losing ground on fears of an economic slowdown or recession, traders told Reuters this week. “The market is very bearish at the moment. No one is rushing to buy,” a Singapore-based trader told Reuters. However, the US labor market remains strong and the latest employment data far exceeded analysts’ estimates. Total nonfarm payroll employment rose by 528,000 in July and the unemployment rate fell to 3.5 percent, the U.S. Bureau of Labor Statistics said last week. The numbers crushed Dow Jones estimates of 258,000 job additions and an unemployment rate of 3.6%.
“The report throws cold water on a significant decline in labor demand, but is a good sign for the broader economy and U.S. workers,” Michael Gapen, chief economist at Bank of America, said in a note cited by CNBC. Some analysts say the 9% drop in WTI Crude futures last week was overblown and economic worries could be overblown. Caroline Bain, chief commodities economist at Capital Economics in London, told the Houston Chronicle: “The big picture,” she said, “is that the market may be pricing in too much fear of a recession.” Short-term oil price movement will be driven by the economic picture, inflation and interest rate hikes, but some bullish factors could tip the sentiment back into the price rally. These include very low global spare capacity, the inability of OPEC+ to pump much more than it is producing now, and the wildcard of Russia and its confrontation with the West. It will become clearer in the coming months how Russian supply to the markets could be affected and whether Putin will simply stop selling oil to those countries that join a potential price cap for Russian oil. The proposed price cap includes insurance and other services for transporting Russia’s oil, but Moscow has already said it will not export its oil if the price cap is set below its production costs. While some analysts say oil is headed even lower with the looming recession, others say this recession could be different and not result in a real year-over-year drop in oil demand. Goldman Sachs, for example, revised down its Brent price forecast for this quarter to $110 a barrel from its previous forecast of $140 a barrel, but still believes the case for higher oil prices remains strong. “We believe the case for higher oil prices remains strong even as all these negative shocks play out, with the market remaining in a bigger deficit than we expected in recent months,” Goldman Sachs strategists wrote in this note. the week reported by Bloomberg. .
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