Oil retreats 2% on global recession-linked fears

WTI continued to slide on Wednesday on recession fears. Analysts said oil prices dropped due to recession fears; citing numerous reasons, including the unwinding of the oil trade as inflation hedge, a stronger US dollar, hedge funds reacting to negative oil price momentum, producer hedging, and new mobility restriction concerns in China.

West Texas Intermediate (WTI) crude oil was lower again overnight as recession worries continue to weigh on the black gold. At the time of writing, WTI is trading at $98.11 after recovering from the lows of $95.09.

Earlier, on Wednesday, WTI was trading down 1.55% on the day in the runup to the release at $97.96—a nearly $14 slide on the week. Brent crude was trading down 1.95% on the day at $100.80—a roughly $17 drop on the week.

The US Energy Information Administration (EIA) will issue latest data on Thursday. Both reports were delayed one day by the US July Fourth holiday. Brent futures for September delivery fell $2.08, or 2.0%, to settle at $100.69 a barrel. US West Texas Intermediate (WTI) crude fell 97 cents, or 1.0%, to settle at $98.53. Both benchmarks closed at their lowest since April 11, in technically oversold territory for a second straight day. US diesel futures also fell over 5%.

Crude oil prices retreated about 2% to a 12-week low in volatile trading environment on Wednesday. Oil prices are extending the Tuesday’s heavy losses as investors grew more and more worried about energy demand that would receive a severe blow by a potential global recession. On Tuesday, WTI slid 8% while Brent tumbled 9%, a $10.73 drop that was the third biggest for the contract since it started trading in 1988. Its biggest drop was $16.84 in March.

US crude inventories forecast fell about 1.0 million barrels last week. A drop in crude stockpiles could support prices. The American Petroleum Institute (API) reported a build this week for crude oil of 3.825 million barrels, while analysts predicted a draw of 1.1 million barrels.

The build comes as the Department of Energy released 5.9 million barrels from the Strategic Petroleum Reserves in Week Ending July 1, to 492 million barrels—the lowest it’s been since 1985.

US crude inventories have shed some 68 million barrels since the start of 2021 and about 5 million barrels since the start of 2020. In the week prior, the API reported a large draw in crude oil inventories of 3.799 million barrels after analysts had predicted a draw of just 110,000 barrels.

Trade was volatile, with both crude benchmarks up over $2 a barrel early on supply concerns and down over $4 a barrel at session lows. Crude futures have been extremely volatile for months.

With the US Federal Reserve expected to keep raising interest rates, open interest in WTI futures fell last week to its lowest since May 2016 as investors cut back on risky assets.

There are undeniably concerns about recessionary demand destruction, plus, WTI open interest at multi-year lows has created a bit of a liquidity crunch. US job openings fell less than expected in May, pointing to a still-tight labor market that could keep Federal Reserve policy aggressive as tries to bring high inflation down to its 2% target.

In China, the world’s biggest oil importer, the market worried that new COVID-19 lockdowns could cut demand. China’s crude oil imports from Russia in May soared 55% from a year earlier to a record level. Russia displaced Saudi Arabia as top supplier, with refiners grabbing discounted supplies as Western countries sanctioned Moscow over its invasion of Ukraine.

Further pressuring oil prices, Equinor ASA (EQNR.OL) said all oil and gas fields affected by a strike in Norway’s petroleum sector were expected to be back in full operation within two days.