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Oil dropped to levels not seen since before Russia’s invasion of Ukraine as record US inflation and disappointing earnings from Wall Street intensified fears of a recession.
The global crude benchmark fell as much as 5.1% to trade under $95 a barrel, touching its lowest level since late February. Crude has been in decline since early June on escalating fears the US may be pushed into a recession. Shortly after the war began, Brent futures skyrocketed to above $139 as Russia’s war in Ukraine disrupted an already tight supply-demand balance.
Wider markets were softer on Thursday, while the dollar resumed its advance, weakening commodities priced in the currency. Traders have shifted toward expectations of a historic one percentage-point Fed interest rate hike later this month.
Nonetheless, global oil supply remains tight, as can be seen in time spreads showing a wide premium for immediately available barrels. Goldman Sachs Group Inc. said the market is “screaming” tightness and that this week’s selloff has been driven by low liquidity and technical factors.
“Crude is in free fall as demand data is softer and macro risk factors completely overwhelm the fundamentally tight physical market,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “Risks over the next few weeks look skewed to the downside, keeping even the most convicted bulls in wait-and-see mode.”
President Joe Biden landed in the Middle East on Wednesday just as a report showed US inflation soared to a four-decade high last month, much of it driven by energy costs.
“Concerns about the impact of high inflation on economic growth and oil demand are visibly growing,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. “Outright prices and the structure are out of sync.”
There were signs that high US gasoline prices are starting to take their toll on consumption. US gasoline demand fell to the lowest level for this time of year since 1996, even slipping below the same week in 2020, according to the Energy Information Administration. The four-week rolling average of gasoline demand was the lowest on a seasonal basis since 2000. Crude stockpiles rose by 3.25 million barrels.
Renewed Covid-19 outbreaks in China have also weighed on the outlook for oil demand. Shanghai’s flareup appears to be easing, but other regions are being locked down and facing restrictions to curb the spread of the virus. Nationwide, 292 cases were recorded on Wednesday.