Oil retreated along with other key commodities as concern over a global economic slowdown intensified, with Federal Reserve Chair Jerome Powell warning a US recession is possible.
West Texas Intermediate dropped below $104 a barrel in Asian trading after closing at a six-week low on Wednesday. The US crude benchmark has lost around 15% since the close on June 8 as the drumbeat of warnings over the state of the world’s economy has grown steadily louder.
Powell said while he didn’t see the likelihood of a recession as particularly elevated, it was a possibility. Commodity price hikes were “clearly” connected to the war in Ukraine, he said. Crude’s retreat has been accompanied by deep losses in other raw materials, especially base metals such as copper.
Oil is rapidly giving up its gains in what’s been a volatile quarter as investors attempt to gauge the trajectory of the US economy and its impact on raw materials. While demand seems to be picking up in China, the world’s biggest importer, the country’s Covid Zero policy means there’s a constant risk of more virus lockdowns. There’s around a 50% chance of the world economy succumbing to a recession, according to Citigroup Inc. and Deutsche Bank AG.
There’s still no consensus among major banks on oil’s outlook, however. Goldman Sachs Group said in a note on Tuesday that demand is still running ahead of supply, while warning that the Fed “cannot print commodities.” Citi sees oil dropping into the year-end and beyond.
WTI August delivery fell 2.1% to $103.98 a barrel on the New York Mercantile Exchange at 8:45 a.m. in Singapore.
Brent for August settlement shed 1.9% to $109.62 a barrel on the ICE Futures Europe exchange.
Russia’s war in Ukraine, which has upended oil flows, will extend into a fifth month on Friday. China and India may be buying more Russian oil than the US previously believed, easing a supply crunch in global markets, Cecilia Rouse, chair of President Joe Biden’s Council of Economic Advisers, said Wednesday.
A US industry snapshot pointed to higher inventories. The American Petroleum Institute reported crude holdings rose by 5.6 million barrels last week, while gasoline holdings also climbed, according to people familiar with the data. Official figures from the Energy Information Administration have been delayed.
While crude prices have been in retreat, the market remains firmly in backwardation, a bullish pattern marked by near-term costs trading above longer-dated ones. Brent’s prompt spread — the difference between its two nearest contracts — was $3.04 a barrel in backwardation, compared with $2.73 at the end of last week.
There are also other signs that physical markets remain tight, with US processors reluctant to commit investment, and a big chunk of Chinese processing capacity not being used. There’s no great relief coming in US refining capacity, said Mark Lashier, president of Phillips 66 Co.