Oil continues two month downturn as recession fears weigh on prices
Oil prices has resumed their two-month long downturn – driven by concerns of flagging demand – with both major benchmarks sliding for a second day.
Prices are now set for a weekly decline, with the Bank of England’s struggle to contain inflation and a hefty 50 basis point interest rate hike adding further uncertainty about future economic growth in developed economies.
Brent Crude has dropped 1.66 per cent to $72.91 per barrel in this morning’s session, while WTI Crude has slid 1.84 per cent to $68.23 per barrel over the same time period.
This follows the oil prices losing around $3 per barrel on Thursday after the UK’s central bank was forced to raise interest rates to five per cent, with inflation persisting at 8.7 per cent.
Peel Hunt analyst Ian Williams said the “risk off mood” sent the oil price lower and that “Europe is set for further weakness.”
Higher interest rates weigh down oil demand, because they increase borrowing costs for businesses and consumers.
This hampers growth and subsequently demand, and has so far outweighed expectations of tightening markets later this year – with the first signs of lower US crude stocks failing to raise prices.
This week’s US inventory report revealed a decline in crude stocks of 3.8m barrels, which was not enough to override economic concerns.
Commerzbank’s commodities analyst Barbara Lambrecht warned the oil market is “overly preoccupied with demand concerns.”
She doubted OPEC production cuts would have any impact of prices, noting that members are not bound by their pledges.
“Given that output of those OPEC countries not bound by the production targets probably rose rather than fell in June, the figures are unlikely to lend any buoyancy to prices,” Lambrecht said.
The IEA and OPEC still forecast rallies during the second half of the year – particularly as demand in China rebounds – however, the picture is becoming increasingly complicated, with unexpected developments such as a glut in Iranian supply.
Looking ahead, oil could be hampered further the prospect of more US interest rate hikes, with Federal Reserve expected to announce further interventions in the economy.
Chair Jerome Powell confirmed this week that two more rate hikes of 25 basis points each by the end of the year was “a pretty good guess.”