Oil prices have fallen about $30 a barrel since the recent peak in early June, before the Fed and other central banks began aggressively raising interest rates to combat runaway inflation. Tighter monetary policy is expected to slow economic growth, while several financial market indicators suggest markets are anticipating recessions that could slow global oil demand growth.
The most closely watched major forecasters – OPEC, EIA and the International Energy Agency (IEA) – continue to expect global oil demand to grow both this year and next, with demand set to surpass pre-COVID levels in 2023.
Still, the oil market is currently heavily focused on the 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 sign of rising expectations of a recession sometime in the next few months.
Despite a solid U.S. job market and still-high economic activity, financial markets – as seen in stock futures – are pointing to higher chances of a significant slowdown in the economic cycle or recession over the next six months, John Kemp, senior market analyst from Reuters Remarks.
Then there is the falling open interest in oil futures as many investors have fled the market due to the high volatility, exacerbating that volatility as liquidity falls.
See also: The number of oil rigs is increasing while the number of gas rigs is decreasing
In one recent assessment, indicators point to a global maritime slowdown in trade growthin a sign that the economic slowdown is underway and a recession may soon hit key markets, threatening oil demand.
This week, the Drewry World Container Index fell below $5,000 per 40-foot container for the first time since April 2021 – a strong signal of a “return to sanity” for Freight Rates, the provider of research and advisory services to the global shipping and shipping industry said. The composite index fell 8% this week 29th weekly decrease in a rowand is down 52% compared to the same week last year.
The Eurozone and the UK are now expected to enter recession later this year, while the US will experience a mild recession in mid-2023, according to Fitch Ratings said This week, the company revised its forecast for global GDP growth to 2.4% in 2022, down 0.5 percentage points from the June forecast. Global economic growth of just 1.7% is now expected for 2023, which corresponds to a decline of 1 percentage point.
“We’ve had something 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 slump in China,” said Brian Coulton, Fitch’s chief economist.
The oil market is also concerned about the slowdown expected from continued rate hikes. The Fed still has more to do to tame inflation, and interest rates still need to be tamed further rise to over 4% through early 2023 and stay there, Cleveland Federal Reserve Bank President Loretta Mester said late last month. The Fed’s current target interest rate is in the 2.25% to 2.5% range after two consecutive hikes of 75 basis points, or 0.75%.
OPEC, on the other hand remains optimistic on global economic growth and said in its latest Monthly Oil Market Report (MOMR) that growth will 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 the recession.
The IEA has reduced global oil demand growth estimate by 110,000 bpd to 2 million bpd for 2022 as China’s oil demand is expected to fall for the first time in more than three decades due to the rapid pace of COVID lockdowns.
The IEA noted in its report this week that still-robust Russian supply could fall by 2.4 million barrels a day later this year and early next year if the EU embargo on Russian oil imports by sea goes into effect .
Short-term supply is as uncertain as demand, according to the oil broker PVM Oil Associates.
“The wild card in forecasting oil budgets might be the supply side of the oil equation, but there is also a noticeable lack of consensus in forecasting future oil demand. This makes forecasting almost impossible and no certainty can be expected in the near future,” said PVM.
By Tsvetana Paraskova for Oilprice.com
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