Oil feels sting of recession concerns with 3rd weekly retreat

SINGAPORE (BLOOMBERG) – Oil headed for a third weekly drop on Friday (July 1), its longest losing run this year, on concern that a potential recession will cut into energy demand.

West Texas Intermediate traded below US$106 a barrel after tumbling on Thursday as commodities were pummelled. The US benchmark has shed 2 per cent this week despite signs that the physical crude market remains tight.

Data this week showed weakness in United States consumer spending, which is by far the biggest contributor to gross domestic product. That follows a pivot by the US Federal Reserve to aggressively tighten policy to quell raging inflation.

Oil fell about 8 per cent in June as investors fretted over a potential global slowdown, eroding a rally spurred by the war in Ukraine, interruptions to supplies and rising demand. The jump in prices alarmed US President Joe Biden, who is spearheading efforts to get producers in the Middle East to boost crude output.

“Oil may remain choppy,” said Mr Zhou Mi, an analyst at Chaos Research Institute in Shanghai.

Deepening recession fears would hurt oil products and squeeze refining margins, although high run rates are offering support with fundamentals still tight, said Mr Zhou.

As crude backtracked on Friday, commodities suffered a fresh wave of selling, with copper and iron ore among the biggest losers.

Since hitting a record in early June, the Bloomberg Commodity Spot Index has sunk 16 per cent. The US dollar rose, making raw materials more expensive for holders of other currencies.

The Organisation of Petroleum Exporting Countries and its allies ratified an oil-production increase this week, completing the return of supplies halted during the pandemic.

Mr Biden will travel to the Middle East later this month to urge Saudi Arabia and the United Arab Emirates to increase supplies further.

In a sign that US demand remains robust for now, a record number of drivers are expected to hit the road this weekend ahead of the country’s Independence Day on July 4, buttressing petrol consumption.

Average retail pump prices have eased slightly in recent weeks after hitting a record above US$5 a gallon in June.

Economic data from Asia, however, pointed to weakening conditions. Purchasing manager indexes from across the region eased in June, with South Korea and Thailand among those showing the biggest declines, according to S&P Global.

“For oil, it is clear that macro developments are still the key driver for price direction at the moment,” Mr Warren Patterson, the Singapore-based head of commodities strategy at ING Groep, said in a note. “Fundamentally, the market is still tight, so we expect only limited downside in prices.”