Crude Prices Drop For Second Day As Recession Sentiments Intensify

But Goldman Sachs suggests the sell-offs are overdone: File Image/Pixabay

Convinced that a recession – at least in the U.S. – is unavoidable, traders caused another round of losses for crude on Wednesday, with West Texas Intermediate settling below $100 for a second consecutive day.

The drop was also attributed to months of dwindling liquidity undermining the use of oil as a hedge against inflation.

However, Goldman Sachs & Co. analysts including Damien Courvalin said in a note that "While the odds of a recession are indeed rising, it's premature for the oil market to be succumbing to such concerns; the global economy is still growing, with the rise in oil demand this year set to significantly outperform GDP growth."

Indeed, even in China, whose zero-tolerance Covid policies have led to yet more crippling lockdowns, overall consumption of gasoline and diesel last month was at almost 90 percent of June 2019 levels, according to people with knowledge of the energy industry.

While he would not comment on the prospect of a recession, Josh Young, CIO of Bison Interests, told Bloomberg that demand will remain resilient even if Russia resumes exporting oil to the European Union, due to overall supply being so tight.

He said, "I think there's a real potential for demand to surprise."

Still, Ed Morse, global head of commodity research at Citigroup Inc., pointed out that current high fuel prices will contribute to the outlook for oil demand likely seeing further downward revisions in the near future: "Almost everybody has reduced their expectations of demand for the year."

Citigroup reduced its forecast to 2.4-2.5 million barrels per day (bpd), in line with forecasts from the Energy Information Administration and the International Energy Agency.

For the record, WTI for August delivery fell 97 cents to settle at $98.53 per barrel on Wednesday, while Brent for September settled down $2.08 at $100.69 per barrel.

Also on Wednesday, as if to prove that analytical forecasts are often proven wrong, it was reported that Russia is on track for a much milder recession than many experts earlier predicted, thanks mainly to the former Soviet Union's increase in oil production.

Anton Tabakh, chief economist at Moscow-based credit assessor Expert RA, said, "The boxer is now moving again after being knocked down: there was a knockdown, but it's been offset substantially by comfortable export prices, even with the discounts, and the budget's capacity to pour money on the problem."