Oil Futures Plunge on Fear over Recession Slamming Demand

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled at 10-week or better lows Tuesday, with West Texas Intermediate settling below $100 bbl for the first time since May 10, as concerns over recession and resulting lost fuel demand amid economic contraction climb, overshadowing global supply disruptions.

The selloff was preceded by a forecast from Citibank noting an increasing probability for WTI futures to end the year at $65 bbl if recession takes hold, and $85 bbl without recession as the world economy slows. The New York City bank also expects Russian crude oil exports to remain robust even as oil products exports fall amid Western nations' sanctions against Moscow for its unprovoked invasion of Ukraine. The outlook dialed down fear of oil prices hitting $190 bbl with a 3 million bpd loss of Russian oil supply or even $380 bbl under a worst-case scenario of a 5 million bpd loss offered by JP Morgan.

A sense of quietude over the U.S. economy held over the market in the second quarter as the labor market remained tight, overshadowing slowing growth in manufacturing while the Federal Reserve more aggressively tightened monetary policy after initiating the cycle earlier this year. It wasn't until midway through June in which the central bank lifted the federal funds rate by 75 basis points -- the largest single meeting increase in 28 years, as inflation was holding near a 40-year high and broadening. The Personal Consumption Expenditures Price Index by the Bureau of Economic Analysis released June 30 showed spending grew at a modest 0.2% in May, a steep decline from April's 0.6% increase and the 1.2% jump in March, while the U.S. Consumer Sentiment Index from the University of Michigan fell to a record low in June. A 3.1% decline in U.S. manufacturing index in May to 53.1% released July 1 by the Institute of Supply Management was the latest catalyst in prompting the Federal Reserve Bank of Atlanta's GDPNow tracker to show a 2.1% contraction in second quarter U.S. gross domestic product. The tracker's reading joined BEA's estimate first quarter U.S. GDP declined 1.6% on an annual basis to suggest the U.S. economy is in recession.

Economic weakness while consumer prices are still high and employment growth remains strong means efforts by the Fed to reduce inflation could prove enduring. CME Group's FedWatch Tool finds the likelihood for a 75-basis point increase at the July 26-27 Federal Open Market Committee meeting is 83.2%, with a 16.8% probability for a 50-point hike.

The U.S. dollar surged in index trading Tuesday, spiking 1.35% to 106.320 20-year high.

The market will learn if the job market remained strong in June, with the Bureau of Labor Statistics to release its nonfarm employment situation report on Friday (7/8), with 270,000 new jobs expected, down from job growth of 390,000 in May.

NYMEX August WTI futures settled down $8.93 at $99.50, a 10-week low on the spot continuous chart, with ICE August Brent futures ending the session at the lowest print on the spot chart since April 11 at $102.77 bbl, down $10.73. NYMEX August RBOB futures erased 35.88cts with a $3.3290 gallon settlement, a 10-week low on the spot chart, while August ULSD futures dropped back 33.73cts to a $3.6016 gallon 12-week settlement low on the spot continuous chart.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne