With recession worries and rising rates, oil is expected to decline for a second week

Oil is expected to decline, amid recession worries
Oil is expected to decline, amid recession worries

by Tanushree Jaiswal Last Updated: Apr 28, 2023 - 06:12 pm 561 Views
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Brent Crude and WTI crude completed another tepid trading week as recession fears kept oil prices in check. The Brent Crude oil price at $78/bbl is much lower than the levels of $86 that crude had threatened just a week earlier amidst the OPEC supply cuts. Oil prices dropped for the second week and it shows signals of further weakening in the coming week also. One of the key triggers has been the slower than expected growth in the US economy in the first quarter.

In fact, the first advance estimates of GDP growth for Q12023 came in sharply lower at 1.1% as the rate hikes appeared to have actually hit the growth engine. Also, the US being the world’s largest US consumer, that is not great news for oil demand. The Fed is already talking of more rate hikes in the coming FOMC meets, and is likely to put further pressure on the oil prices.

With Brent crude futures trading at around $78.5/bbl and the West Texas Intermediates (WTI) crude trading at around $74/bbl, the price pressure is real and palpable. One has to just look at thing in perspective. In the recent week, Brent fell by 3.8% and in the past two weeks the price of Brent and the price of WTI crude has fallen more than 9.5%. This is despite the sharp cuts in oil supply imposed by the OPEC.

The villain of the piece was US growth

Of course, the real villain of the piece was the slower than expected US economic growth, which slowed more than expected in the first quarter. This is despite jobless claims falling in the week ending April 22nd 2023. That is not all. Despite the pressure on GDP growth, the Fed appears to be hell bent on sustaining its rate hike momentum and that is not great news for the markets. That is what investors are really worrying about. They believe that there could be more potential interest rate hikes as inflation-fighting central banks would go out of their way to slow economic growth and dent energy demand. This could be true of the United States, Britain, and the European Union too.

In the forthcoming central bank meetings, it is expected that the US Federal Reserve, Bank of England, and European Central Bank may raise rates between 25 basis points and 50 basis points to curb inflation. It may be recollected that the Fed meets next on May 02nd and May 03rd and the statement of the Fed will be put out on 03rd May 2023. The CME Fedwatch is already hinting at another 25 bps hike in the May meeting, although it is not too sure after that. But 25 bps rate hike looks to be on the anvil in May 2023 and other developed country central banks like the BOE and the ECB could follow suit. Certainly, the one data point that oil traders would be looking would be the Fed action in the coming week and that is likely to only put further pressure on oil prices.

What about the supply side of the story?

That is the big question. On the supply side, Russian Deputy Prime Minister Alexander Novak almost ruled out any further output cuts despite lower-than-expected Chinese demand. However, it must be remembered that Russia is only an informal member of the Russia Plus alliance and is not a member of the core OPEC. In April, the OPEC Plus had announced combined output reduction of 1.16 million barrels per day (bpd). That clearly does not appear to have made any major dent on the numbers. However, steep fall in oil prices from these levels looks unlikely. For instance, even a small warning from the OPEC Plus could be enough to pull up oil prices. Alternatively, a larger-than-expected drop in US oil inventories ahead of the driving season could also push oil well above $80/bbl. Oil may look weak in the next few days, but the real battle is far from over.

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About the Author

Tanushree is a seasoned professional with 6 years of experience in the Fintech and Edtech industry.


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