Bearish Sentiment Has Taken Hold Of Oil Markets

• Fears of a recession significantly damaging global oil demand appear to be the major force in oil markets, with bearish sentiment growing.
• As well as a recession, oil markets are dealing with resilient Russian oil supply and the potential return of Iran to oil markets.
• Despite this bearish sentiment, the looming embargo on Russian oil, the end of the U.S. SPR release, and strong winter demand could send oil higher.

Concerns about a recession in major oil-consuming markets have weighed on oil prices in recent weeks. Last week, oil dipped to the lowest level in six months, a level last seen before the Russian invasion of Ukraine. This drop was due to concerns about economic growth in China, the world's top crude oil importer, and in Europe and the U.S. amid high inflation and aggressive interest rate hikes.   

The oil market has turned bearish this summer due to fears of slowing oil demand in a recession. Add to this the still resilient Russian supply - contrary to initial expectations of major losses - and the possibility of an Iranian nuclear deal that could return up to 1 million barrels per day (bpd) to the market, and some analysts are saying that the risks to oil prices are tilted to the downside.  

"The balance of risk to the outlook now lies largely to the downside," said Fitch Solutions Country Risk & Industry Research in a report seen by Rigzone. Fitch Solutions kept its Brent Crude forecast at $105 per barrel this year and at an average of $100 per barrel next year. 

Early last week, Fitch Solutions said that the outlook for the Eurozone economy remains "worrying" despite strong GDP data for the second quarter. 

"We continue to forecast growth at just 1.0% next year, on the assumption that activity will lose considerable momentum over H222 and into H123, which will likely see the bloc as a whole flirt with recession (roughly a 50% probability)," Fitch Solutions said in an August 15 report.

Economies with large manufacturing sectors that rely more on natural gas as a source of energy consumption—namely Germany and Italy—are set to experience modest downturns this winter, Fitch Solutions noted. 

Moreover, several banks, including Goldman Sachs, have downgraded their outlooks on China's economic growth this year due to weaker than expected data for July and a tight energy supply.  

Earlier this month, Goldman Sachs also revised its Brent price forecast for this quarter to $110 a barrel, down from a previous projection of $140 per barrel, but said it still believes the case for higher oil prices remains strong. 

In recent weeks, oil prices have been driven down by low trading liquidity and "a mounting wall of worries," Goldman said in a note carried by Bloomberg. Those worries include fears of recession, the SPR release in the U.S., the rebound in Russian crude oil production, and China's snap COVID-related lockdowns, the bank's strategists noted.  

"We believe that the case for higher oil prices remains strong, even assuming all these negative shocks play out, with the market remaining in a larger deficit than we expected in recent months," Goldman Sachs's strategists said.

While oil prices are currently in the grips of recession fears, OPEC remains bullish on fundamentals, including demand, in the near term. The International Energy Agency (IEA) also sees robust demand this year due to increased gas-to-oil switching in power generation and industry because of soaring natural gas prices. In its latest report for August, the IEA raised its 2022 demand growth forecast by 380,000 bpd. 

Global oil demand is still robust and will be such through the end of this year, OPEC Secretary General Haitham al-Ghais told Reuters last week, noting that the recent sell-off in oil doesn't reflect fundamentals and is driven by fear. 

"We still feel very bullish on demand and very optimistic on demand for the rest of this year," al-Ghais told Reuters in an interview.  

Going forward, recession fears will still top the factors shaping the trend of oil prices, but the EU embargo on Russian oil imports at the end of this year and the end of the U.S. SPR release in October could be the next bullish catalysts for oil. 

By Tsvetana Paraskova for Oilprice.com

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