Does the decline in oil prices signal a coming global recession?

Last week, the crude oil markets saw one of the most significant single-day price declines in history. Have the bulls retreated – perhaps for good?

Tuesday’s oil price collapse could go down as one of the most memorable moments of the oil market’s tumultuous year, said Josh Owens in his piece for Oilprice.com. Although oil futures rose slightly on Friday, they still managed to register a weekly decline, bringing a sigh of relief to consumers.

Fears of a global recession helped bring prices down, leading some to speculate that crude markets could be in for some real battering. With central banks – including the United States Federal Reserve – hiking interest rates to tame inflation, investors seemed to already be reacting to the consequences of such a slowdown.

“A growing number of analysts feel many of the world’s leading economies will suffer negative growth in the next few months, and this will drag the U.S. into a recession,” Fawad Razaqzada, market analyst at City Index, told Bloomberg.

The biggest driver of this bearish sentiment has been the concern of a possible recession and an overly hawkish response by the Federal Reserve, said Alex Kimani of Oilprice.com. “Recession fears likely pushed some investors out of the oil trade as an inflation hedge,” Giovanni Staunovo, an analyst at UBS Group AG, told Bloomberg.

Citigroup’s Ed Morse is adding his voice to the growing chorus. Amid higher prices, the outlook for oil demand likely will see further downward revisions, he emphasized. “Almost everybody has reduced their expectations of demand for the year,” Morse told Bloomberg Television on Wednesday. “We don’t see the burgeoning demand coming out of China,” he added, noting that China has been increasing its oil stockpiles this year.

Crude oil prices may collapse to US$65 a barrel by year-end if a recession hits, Citigroup analysts say. Citigroup has already reduced its global demand forecast by about one-third, to 2.4 million to 2.5 million barrels per day (bpd). Bloomberg said this is in line with projections from the U.S. Energy Information Administration and the International Energy Agency.

But crude oil supplies continue to be tight. Russia’s war on Ukraine and its implications on global crude supply haunt the markets. And questions about Kazakhstan’s crude oil exports are rising. On Tuesday, a Russian court ordered a 30-day stoppage of the CPC Terminal, through which more than 30 million barrels of mostly Kazakh crude gets exported each month.

The court order to halt oil loadings from a Black Sea port is unnerving European crude traders, already reeling from the tightest regional market in years, sending prices for competing barrels of oil spiralling, Bloomberg reported.

In the meantime, talk of a price cap on Russian crude oil exports could prompt Russian President Vladimir Putin to play tough with the West, resulting in more tightness in the energy markets. “The most obvious and likely risk with a price cap is that Russia might choose not to participate and instead retaliate by reducing exports,” Kimani wrote for Oilprice.com.

JPM analysts say “it is likely that the Russian government could retaliate by cutting output to inflict pain on the West. The tightness of the global oil market is on Russia’s side.” Crude oil geopolitics continue to extract a price.

Bloomberg reports that the combined monthly exports of Azerbaijan, Kazakhstan, Libya, the North Sea and West – all major European crude suppliers – declined by 1.04 million bpd in June. In a market facing tight supply, a decline is a cause of concern.

Traders are also tracking China’s efforts to contain renewed COVID-19 outbreaks and enable Asia’s largest economy to reopen fully. That would bolster consumption and offset the drag from economic slowdowns in the U.S. and Europe.

“While the odds of a recession are indeed rising, it’s premature for the oil market to be succumbing to such concerns,” Goldman Sachs & Co. analyst Damien Courvalin and his colleagues said in a note.

So it seems premature to say the energy markets are bearish. Unless recession becomes entrenched and global oil demand falls drastically, the dip in prices could just be a passing phase.

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris. For interview requests, click here.

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