Oil's Gains For 2022 Wiped Out Tuesday On Recession, Other Fears

But the Middle East is thriving in an inflationary world: File Image/Pixabay

Tuesday saw all of crude's gains for 2022 wiped out as traders fled the market due to what a respected analyst calls the "absurd" price actions the commodity has recently experienced.

Ed Morse, global head of commodity research at Citigroup Inc., told Bloomberg Television that "We are getting toward the end of the year, and those who made money this year did not want to lose any," and he added that the exodus was due at least in part to a slowdown in the U.S. economy and recession fears.

West Texas Intermediate fell $2.68 to settle at $74.25 per barrel, while Brent dropped $3.33 to settle at $79.35 per barrel.

Wall Street benchmarks also nosedived on Tuesday due mainly to uncertainty about the U.S. Federal Reserve's next possible moves with regards to rate hikes.

It didn't help that the oil price cap enacted in the previous session by the European Union and the Group of Seven encountered confusion in the trading community: that's because the cap of $60 per barrel doesn't fit with how physical crude shipments are purchased and valued in the real world and is creating risk management issues.

John Driscoll, chief strategist at JTD Energy Services Pte Ltd, said, "Physical traders rarely trade on a fixed price; it's a much more complex space where they trade on formulas and spot differentials to a benchmark crude for the trading of actual cargoes as well as for hedging that follows."

Also, the watered down cap not only seemed to fall far short of its intent to punish Russia for invading Ukraine, Asian refiners such as Formosa Petrochemical Corp. of Taiwan saw it as an opportunity to resume Russian purchases after staying on the sidelines since the beginning of the war.

However, the gloom that is driving crude prices downward may be confined largely to North America: the International Monetary Fund on Tuesday disclosed that while global GDP expansion is projected to slow from 6 percent in 2021 to 3.2 percent in 2022, sustained high oil prices are set to push GDP growth in the Middle East from 4.1 percent in 2021 to 5 percent in 2022.

Kuwait's GDP is expected to expand by 8.7 percent in 2022, followed by Saudi Arabia at 7.6 percent, the United Arab Emirates at 5.1 percent, and Oman at 4.4 percent.

Iraq enjoyed GDP growth of 9.3 percent due to oil, while Egypt at 6.6 percent and Algeria at 4.7 percent continued their economic recoveries.

But Tuesday's oil trading in North America remained a sore spot for many observers, and Matt Smith, lead oil analyst at Kpler, remarked that "It's been quite the three days, with OPEC+ deciding not to further cut production on Sunday, the toothless start of the Russian price cap and sanctions yesterday, and a rout in equity markets today; oil speculators are charging for the exits amid a flight from risk assets."