WTI crude oil may ease toward $108/bbl after jumping 2.5% in the previous session, as investors assessed looming risks of a demand-sapping global economic slowdown despite ongoing supply-side issues. Oil has come under pressure last month as signs of an impending US recession, driven by the Fed’s aggressive fight against inflation, prompted a wave of selling in commodities. Investors are also tracking China’s slow emergence from virus restrictions amid recurring outbreaks throughout the country. Still, supply outages in Libya and expected shutdowns in Norway have offset some of the weakness in crude markets. Moreover, oil remains more than 40% up this year as the global economic recovery from the pandemic slump coincided with disrupted Russian supply due to the war in Ukraine. OPEC+ also struggled to pump more crude due to underinvestment, capacity limits and political unrest in some member states.

Oil prices may fall as fears of a global recession weighed on the market even as supply remains tight amid lower OPEC output, unrest in Libya and sanctions on Russia. More economists are coming around to the view that a US recession is possible by the end of next year. The downturn may well be modest, but it might also be long. Many observers expect any decline to be a lot less wrenching than the 2007-09 Great Financial Crisis and the back-to-back downturns seen in the 1980s, when inflation was last this high. But it could end up lasting longer than the abbreviated, eight-month contractions of 1990-91 and 2001. That’s because elevated inflation may hold the Federal Reserve back from rushing to reverse the downturn. Much of the manufacturing sector across the world is already slowing. MCX Crude oil July may drop to 8,300 per bbl.

 

Jigar M Trivedi

Manager – Fundamental Research Analyst (NonAgro Commodities)