Recession Fears Grip Traders, Oil Plummets Below $100 Per Barrel

Meanwhile, analysts squabble over what happens next: File Image/Pixabay

Oil prices on Tuesday took a massive dive and caused West Texas Intermediate to settle below $100 per barrel, due to ongoing recession fears overtaking persistent of strong global demand and supply shortages.

After Shanghai launched mass testing for Covid in nine districts in China, a move that prompted traders to worry about demand recovery in that part of the world and economic resiliency overall, WTI for August delivery fell $8.93 to settle at $99.50 per barrel.

Brent for September settlement dropped $10.73 to settle at $102.77 per barrel.

Fawad Razaqzada, market analyst at City Index, explained, "A growing number of analysts are expecting that many of the world's leading economies will suffer negative growth in the next few months, and this will drag the U.S. into a recession."

But Tuesday's sell-off may have been an overreaction: key market time spreads remain robust, indicating that there's solid demand for near-term supplies.

Also, physical barrels are fetching huge premiums, an example being Arab Light crude: its price will be $9.30 above its regional benchmark in August, an increase of $2.80.

Still, Tuesday found the analytical community split in half, with one side presuming a recession is imminent; and if it comes to pass, Citigroup Inc. warned that oil could collapse to $65 per barrel by the end of this year and decline further to $45 by end-2023.

Analysts including Francesco Martoccia and Ed Morse said in a report that this outlook is based on the absence of any intervention by the Organization of the Petroleum Exporting Countries (OPEC) as well as a decline in oil investments; they added that "For oil, the historical evidence suggests that oil demand goes negative only in the worst global recessions….but oil prices fall in all recessions to roughly the marginal cost."

Andrew Lipow, president of Lipow Oil Associates, suggested that more swings to the downside could occur: "The commodity market can be quite unforgiving when you go into a recession and supplies outstrip demand."

But Amrita Sen, director of research at Energy Aspects, disagreed with these forecasts: she told  media on Tuesday that "Even in a pretty deep recession I just don't see oil prices going below $80, maybe not even $90, because of years of under investment."

In a similar vein, Bart Melek, head of commodity strategy at TD Securities, said in a note, "Recessions don't have a great track record of killing demand….product inventories are at critically low levels, which also suggests restocking will keep crude oil demand strong."