Oil at 8-Month Low on Rate Hikes as Global Downturn Deepens

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent traded on the Intercontinental Exchange accelerated a selloff in afternoon trade Friday, with both crude benchmarks finishing a volatile week at their lowest points since early January. The losses came as investors rapidly repriced the risk of a global recession this year amid an aggressive push from central banks to raise interest rates in an already softening world economy.

Friday's session saw an ugly selloff in ending a week with heightened volatility amid a reassessment of global risk factors. Dow Jones Industrials slid below 30,000, tumbling more than 700 points at one point before ending down nearly 490 points at 29,590, pressing the 30-stock index closer to bear market territory.

The U.S. dollar index, which has an inverse relationship with West Texas Intermediate, spiked to a fresh 20-year high 112.835, which makes dollar-denominated commodities such as oil more expensive for foreign buyers. Euro and British Pound collapsed against the greenback to their lowest level in 37 years.

Moves of this magnitude have quickly changed the narrative that central banks can bring inflation under control without breaking the economy. JP Morgan Asset Management's David Kelly issued a warning this week that the U.S. economy can't handle the Federal Reserve's plan to raise interest rates above 4% without tipping the country into recession.

On Wednesday, the Federal Open Market Committee delivered a 75-basis-point hike for the third consecutive meeting this year and admitted there will be below-trend growth for a period. In addition, Fed officials cut growth projections, raised their unemployment outlook, and repeatedly spoke of the painful slowdown that's needed to curb price pressures running at the highest levels since the 1980s.

"Higher interest rates, slower growth and a softening labor market are all painful for the public that we serve, but they're not as painful as failing to restore price stability and having to come back and do it down the road again," Fed Chairman Powell said Wednesday.

A series of jumbo rate increases were announced this month by the European Central Bank and Bank of England among others as they struggle to bring inflation under control. The UK economy has already fallen into recession this quarter, according to estimates from the Bank of England, with gross domestic product seen contracting by 0.1% in the past three months compared with previously estimated 0.4% growth, following a 0.1% decline in the second quarter. Against this backdrop, new U.K. Prime Minister Liz Truss proposed a radical set of economic reforms, including the biggest tax cuts for individuals and corporations since 1985 and investment incentivizes for its ailing energy systems.

"It's half a century since we've seen tax cuts announced on this scale," said Paul Johnson, director of the Institute for Fiscal Studies.

Volatility in the markets follows another batch of bearish economic data out of Eurozone, showing business activity deteriorated for a third consecutive month in September. Led by Germany, which saw its manufacturing activity drop to 45.9 this month, the lowest since May 2020, the eurozone recorded its purchasing managers index fell into contraction territory. Both services and manufacturing output are well below 50 at 48.9 and 46.2, respectively, signaling a broad-based contraction in business activity.

"A eurozone recession is now in the cards as companies report worsening business conditions and intensifying price pressures linked to soaring energy costs," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, in comments on the data. "The early PMI readings indicate an economic contraction of 0.1% in the third quarter, with the rate of decline having accelerated through the three months to September to signal the worst economic performance since 2013, excluding pandemic lockdown months,"

At settlement, WTI futures for November delivery plummeted $4.75 to $78.74 per barrel, while the front-month Brent contract declined to $86.15 per barrel, down $4.31. NYMEX ULSD October futures nosedived 17.44 cents to $3.2371 per gallon, and the front-month RBOB contract plunged 13.27 cents to $2.3830 per gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges