Recession Fears Return To Spook Traders As Oil Declines Nearly 1%

Still, analysts see oil hitting $125-$150 next year: File Image/Pixabay

Oil traders' ability in the previous session to be distracted by demand concerns due to inflation and other factors proved to be short-lived on Tuesday: all it took was news of U.S. consumer prices rising in August for crude prices to decline by nearly 1 percent.

Brent for November delivery settled 83 cents lower at $93.17 per barrel (a 0.9 percent loss), while West Texas Intermediate declined 47 cents (0.5 percent) at $87.31, when the U.S. Labour Department disclosed that the consumer price index gained 0.1 percent last month after being unchanged in July; economists had forecast a 0.1 percent fall.

The fear in analytical circles is that this will give impetus for the U.S. Federal Reserve to deliver another interest rate increase when it meets next week.

Dennis Kissler, senior vice president of trading at BOK Financial, said, "The Fed may have to raise rates quicker than expected, which could cause a 'risk back off' sentiment in crude and further strength to the dollar."

Adding to the bearish sentiment was China's continued lockdowns of major cities to support its zero infection Covid mandate: official data on Tuesday showed that the number of trips taken over China's three-day Mid-Autumn Festival holiday shrank, with tourism revenue also falling.

Accordingly, Morgan Stanley said in a note that "The oil market's structural outlook remains one of tightness, but for now, this is offset by cyclical demand headwinds."

Indeed, traders all but ignored news that the U.S. Strategic Petroleum Reserve fell 8.4 million barrels to 434.1 million barrels last week, the lowest since October 1984.

Given China's stance on Covid and recession fears, Morgan Stanley and UBS Group AG cut its outlook for Brent for the third quarter by $12 per barrel to $98 and lowered estimate for fourth quarter by $5 to $95.

Still, fundamentals can't be ignored for long, and Christyan Malek, global head of energy strategy for JPMorgan Chase & Co., on Tuesday pointed out to Bloomberg the realities of demand outpacing supply and the failure of renewables to fill the gap.

He said that as crude production falls behind growth,  "We're back to the same issue, which is how do we meet this energy deficit in the future?

"It can't be coal, it can't be gas - we're maxed out on NG; it's got to be through solar and wind and then when you've gone through that, we still have a major deficit in oil, which basically means that we're going to see a repricing of oil significantly higher."

Malek reiterated his company's $150 per barrel price forecast, in comparison to Morgan Stanley's expectation that Brent will recover to $125 per barrel by the end of September 2023.