Oil prices have fallen about $30 a barrel since the recent peak in early June before the Fed and other central banks began aggressive interest rate hikes to fight runaway inflation. Tighter monetary policy is expected to slow economic growth, as several financial market indicators suggest markets are expecting recessions, which could slow growth in global oil demand.
The most watched major forecasters – OPEC, the EIA and the International Energy Agency (IEA) – continue to expect growth in global oil demand this year and next year, the demand exceeding pre-COVID levels in 2023.
Yet the oil market is currently very focused on bearish signals, with prices reflecting fears of an economic slowdown in China, a recession in major European economies and a slowdown or recession in the United States. .
Several recent financial and trading indicators are pointing to a slowdown, and the market is taking this as a signal for growing expectations of a recession at some point over the next few months.
Despite a strong labor market in the United States and a still high level of economic activity, financial markets – as seen in equity futures – indicate higher risks of a major downturn in the economic cycle, or a recession, over the next six months, John Kemp, senior market analyst at Reuters Remarks.
Then there is the drop in open interest for oil futures as many investors have fled the market due to high volatility, thus exacerbating that volatility as liquidity dwindles.
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In one of the most recent assessments, the indicators point to a slowdown in business growtha sign that the economic slowdown is underway and that a recession in major markets could soon materialize, threatening oil demand.
This week, the Drewry World Container Index fell below $5,000 per 40ft container for the first time since April 2021 – a strong signal of a ‘return to reason’ for freight rates, the provider of research and advisory services to global maritime and international companies. shipping industry said. The composite index fell 8% this week, the 29th consecutive weekly declineand fell 52% compared to the same week last year.
The euro zone and the UK are now expected to enter recession later this year, while the US will suffer a mild recession in mid-2023, Fitch Ratings said this week, revising its forecast for global GDP growth down to 2.4% in 2022, down 0.5 percentage points from the June forecast. Global economic growth is now expected to be just 1.7% in 2023, down 1 percentage point.
“We’ve had kind of a perfect storm for the global economy in recent months, with the gas crisis in Europe, a sharp acceleration in interest rate hikes and a deepening housing crisis in China,” Brian said. Coulton, chief economist at Fitch.
The oil market is also apprehensive of the expected slowdown from continued interest rate hikes. The Fed still has work to do to control inflation, and key interest rates must go above 4% early in 2023 and stay there, Cleveland Federal Reserve Chair Loretta Mester said late last month. The Fed’s current target rate is between 2.25% and 2.5%, after two consecutive hikes of 75 basis points, or 0.75%.
OPEC, however, remain optimistic on global economic growth, stating in its latest Monthly Oil Market Report (MOMR) that growth is expected to remain robust at 3.1% this year and another 3.1% next year, in a forecast suggesting that the cartel expects healthy growth in oil demand despite market fears of recession.
The IEA has reduced the growth of its global oil demand estimate from 110,000 bpd to 2 million bpd for 2022, as he expects China’s oil demand to fall for the first time in more than three decades due to instant COVID lockdowns.
The IEA noted in its report this week that the still resilient Russian supply could fall by 2.4 million bpd later this year and early next year when the EU embargo on imports of Russian oil by sea will come into force.
Short-term supply as uncertain as demand, oil broker says PVM Oil Associates.
“The wild card in forecasting the oil balance might be the supply side of the oil equation, but there is also a tangible lack of consensus in forecasting future oil demand. This makes predictions nearly impossible and no certainty is anticipated in the near future,” PVM said.
By Tsvetana Paraskova for Oilprice.com
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