Oil Drops On Recession Fears As Demand Destruction Now Openly Debated

by Ship & Bunker News Team
Thursday June 23, 2022

U.S. Federal Reserve chair Jerome Powell stating on Thursday that his commitment to fight inflation is "unconditional" stoked fears of further rate hikes, and as a result crude prices dropped yet again, despite robust demand and an extremely tight market.

Following Powell's testimony before a House committee, West Texas Intermediate fell $1.92 to settle at $104.27 per barrel, and Brent declined $1.69 to settle at $110.05 per barrel; open interest across the main futures contracts has fallen to the lowest since 2015 in recent days. 

Dennis Kissler, senior vice president of trading at BOK Financial, remarked,  "Future demand destruction from a possible looming recession is countering near-term real demand that remains very strong; As long as the fear of a recession remains, the near-term strong demand is keeping crude choppy."

But demand is beginning to appear only as strong as reported by different sources: for example, while in general supply appears to be extremely tight, people familiar with the data told Bloomberg on Thursday that the American Petroleum Institute will soon release figures showing that crude holdings rose by 5.6 million barrels last week, while gasoline holdings also climbed.

As usual, analysts can't agree on the outlook for oil either: Goldman Sachs Group Inc. said in a note that demand is still outstripping supply, but Citi believes crude will drop through this year and beyond.

Also, Mandy Xu, head of equity derivatives strategy at Credit Suisse Group, told media that 2022's standout inflation trade of backing commodities is coming under pressure due to recession fears and will curb demand for raw materials; he warned that derivatives-market bets for crude show growing speculation that the deteriorating economic outlook may outweigh supply challenges.

Robert Yawger, director of energy futures at Mizuho, said high gasoline prices starting to slow demand has "definitely worked its way into the conversation," but he added that he thought gasoline still had room to rise.