Crude oil prices are set to extend their losing streak to three weeks as recession fears and anxiety about the U.S. banking system prevail over any supply concerns.
West Texas Intermediate alone has shed about 10% this week, with the cumulative decline for Brent since the start of the year at 14%, according to Bloomberg. What's more, the decline comes despite the move by OPEC+ to reduce its collective output by more than a million barrels daily.
Oil prices had rebounded somewhat in early morning trading on Friday, but remain on course for a 7%-8% weekly decline.
Not everyone is depressed, however. "While sentiment is negative at the moment, the market is in oversold territory and our balance sheet still shows that the market will be in deficit over the second half of the year, which should drive prices higher," the head of commodities strategy at ING Groep, Warren Patterson, told Bloomberg.
On the other hand, "It has been a double whammy for oil prices," according to IG market strategist Jun Rong Yeap, who spoke to Reuters.
"Renewed U.S. banking fallout (has prompted) fears of a wider contagion and amplifying recession talks, while a surprise contraction in China's manufacturing activities pushed back against reopening optimism on oil demand outlook."
Reuters's own John Kemp called a recession in U.S. manufacturing and freight transport, noting activity in those fields has been on the decline for six months in a row, driving lower diesel consumption and also lower electricity consumption.
These trends suggest that concern about oil demand in one of the biggest consumers—and the biggest producer—are not just market jitters. Neither is fear of a banking meltdown after the second-biggest bank collapse since the 2008 crisis saw First Republic Bank taken over by JP Morgan.
Meanwhile, supply risks remain. Iraq and Kurdistan have yet to reach a deal that would allow for the resumption of exports of crude from the autonomous region. If U.S. recession fears subside at some point, they may well be replaced by supply anxiety that could push oil higher.
By Irina Slav for Oilprice.com
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The pressure on oil prices could continue until market fears of a global banking or financial crisis resulting from the collapse of three US commercial banks start to subside.
Two contradictory forces at play in the United States are enhancing these fears. One is the Federal Reserve Bank trying to control inflation by raising interest rates to 6% now from almost zero a year ago and in so doing it is undermining commercial banks’ liquidity and making it very costly for them to borrow. The other force is a threat of more bank collapses because of banks' inability to remain solvent.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert