Oil Struggles Upward On Fed Fears As Analysts Voice Varying Degrees Of Pessimism

Meanwhile, OPEC again fails to reach its output targets: File Image/Pixabay

Oil on Monday achieved modest gains due to a weakening U.S. dollar and traders waiting for what many analysts think will be a 73 basis point hike enacted by the Federal Reserve – which critics say will cause the recession in that country to fully blossom.

In fact, earlier in the session oil prices plummeted 3.5 percent due to Fed fears, and Robert Yawger, director of the futures division at Mizuho Securities USA, called the subsequent rally "a knee-jerk reaction to the oversold situation that we had this morning; I'd be surprised if we held onto these gains over the next couple of days."

For the record, Fitch Ratings forecast that the Eurozone and UK are now expected to enter recession later this year, while the U.S. will suffer a mild recession in mid-2023; accordingly, Fitch downsized its world GDP growth forecast to 2.4 percent in 2022, down by 0.5 percentage points from the June forecast.

Global economic growth is now expected at just 1.7 percent in 2023.

Adding to the bearish sentiment on Monday was the Riyadh-based International Energy Forum reporting that global demand for oil in July dropped by 1.1 million barrels per day (bpd) in a period when oil usage typically increases; also, the Joint Organizations Data Initiative noted that China's crude imports and use of oil in refineries fell year-on-year.

West Texas Intermediate on Monday rose 62 cents to settle at $85.73 per barrel, and Brent rose 65 cents to settle at $92 per barrel.

Also of note on Monday, the Organization of Petroleum Exporting Countries (OPEC), which has threatened to cut production because it doesn't feel lower oil prices correlate with the physical market, fell short of its output target by 3.5 million bpd in August, according to an internal document (OPEC missed its target in July by 2.8 million bpd).

For those focused not on the prospect of waning demand but the very real situation of tight supply, OPEC's failure to perform was troubling: Andrew Lipow, president of Lipow Oil Associates, said, "The surveys of OPEC+ production being so far below their quotas for August has the market feeling that they're simply unable to increase their production if the market demands."

Looking forward, analysts as usual expressed conflicting views about the oil market: some pundits held that China beginning to ease some of its Covid restrictions in some cities would provide support, but ANZ analysts worried that "The market still has the start of European sanctions on Russian oil hanging over it….as supply is disrupted in early December, the market is unlikely to see any quick response from U.S. producers."

For his part, John Kemp, senior market analyst for Reuters, said that despite a solid U.S. job market and high level of economic activity, the financial markets point to higher chances of a major slowdown over the next year that "would dampen oil consumption and lead to lower prices."