The risk of the global economy slowing down further and slipping into negative growth territory has been on a strong increase in the past few months. So much so that oil prices lost about a quarter of their value in the third quarter after rising strongly over the first two quarters of the year.
It appears that this was only the beginning. Now, the UN is warning that a recession is imminent, and oil traders are selling their position and fleeing a market that may very soon see a positive development as OPEC+ is expected to agree to the deepest production cut since 2020.
The United Nations Conference on Trade and Development this week published a report in which it blamed monetary tightening for an imminent recession that will lead to a worst global stagnation than the 2008 financial crisis and the pandemic.
"According to the report, rapid interest rate increases and fiscal tightening in advanced economies combined with the cascading crises resulting from the COVID pandemic and the war in Ukraine have already turned a global slowdown into a downturn with the desired soft landing looking unlikely," UNCAD said in a press release.
"In a decade of ultra-low interest rates, central banks consistently fell short of inflation targets and failed to generate healthier economic growth. Any belief that they will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble."
The oil market is already in a state of emergency adaptation to the new danger. According to Reuters' John Kemp, hedge funds and other institutional traders were net sellers for 10 of the last 16 weeks, reducing their positions across the most traded oil contracts by a combined 237 million barrels since June.
Further reflecting growing fears of a recession during the third quarter, Kemp's figures showed that institutional traders reduced their bullish long-term positions on oil to a ratio of 3.61 to 1 from 6.68 to 1 in June.
Meanwhile, OPEC+ is tightening the reins in response to this sentiment, planning to reduce its production of crude substantially at its next meeting, taking place on Wednesday in Vienna.
Related: Trading Giants Expect Robust Oil Demand Despite Recession Fears
"The OPEC ministers are not going to come to Austria for the first time in two years to do nothing. So there's going to be a cut of some historic kind," Dan Pickering from Pickering Energy Partners told CNBC this week.
Indeed, reports suggest a cut of over 1 million bpd in production, although some analysts have noted that the actual cut may be lower, with the official figure referring to OPEC+ production quotas rather than actual output. The organization has been falling significantly short of its quotas in the past few months, with the gap between quotas and actual production widening to 2.85 million bpd in August.
Yet because of the OPEC+ cut, analysts are virtually sure oil prices will rebound, perhaps, strongly, by the end of the year, despite the recession fears.
"Oil tanks as global growth concerns hit panic mode given a chorus of central bank commitments to fight inflation. It seems central banks are poised to remain aggressive with rate hikes and that will weaken both economic activity and the short-term crude demand outlook," Oanda analyst Edward Moya told Reuters last month.
This week, oil gained 5 percent on the first day of trade for October thanks to the OPEC+ cuts, with Goldman now seeing Brent crude at $105 per barrel by the end of the year and WTI at $95 per barrel.
This suggests something that was already clear last year. Fundamentals might step aside for a while, but they always return to claim their role in oil price formation. The danger of a recession certainly has negative implications for oil demand growth, but in a context with tight supply, the outlook on prices invariably changes from a bearish to a bullish one, even though what is brewing is the worst recession in decades.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
The technology of oil *DRILLING* has be undergoes true astonishment YES ABSOLUTELY but oil as a commodity in actual US cash dollar settlement trade is still only worth not *EVEN* one US Bucky a Barrel. Still what remarkable tales be told as mere *TRILLIONS* be vaporized and at times a bare portion recreate still For Whom the Bell Tolls the end is not nigh but begotten some time ago now.
From that to this is what I imagine the curious sort truly do indeed wonder because whatever came before now be *GONE* for *ALL TIME* Epoch having ended.
However, they don’t need the brain of Albert Einstein to tell them that oil markets have been on a bull run since January 2021 and that the fundamentals are still the same, namely a global oil market at its most bullish state since 2014, a robust global oil demand and a shrinking global oil spare production capacity including OPEC+’s.
They let fears of an impending recession colour their judgement. But global oil demand is shrugging off these fears. The reason is a new form of recession.
Under normal circumstances, one would expect recession to cause a shrinking of the global economy with oil demand destruction. But we are facing a new form of recession where global oil demand will continue to be robust and prices will continue to trend upwards while the global economy will shrink but without with a demand destruction since there is nothing to destruct. The reasons are a very tight global oil market and a fast-shrinking global spare oil capacity .
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert