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After several weeks of gains, WTI tumbled 9.2% this week and Brent fell 7.3% as rate hikes by the Fed and other central banks heightened fears of recession, a scenario that would weigh on demand.
(Boursier.com) — On Friday, the oil markets abruptly ended a series of 4 weeks of uninterrupted rise for Brent and 7 weeks (!) for the American light crude oil WTI. Crude prices fell as the markets gave in to fears of recession generated by the tightening of monetary policies almost everywhere on the planet, to fight against soaring inflation.
Friday evening, the barrel of American light crude WTI (July futures) plunged 6.8% to $109.56 on the Nymex, while the Brent North Sea August expiration shed 5.6% to $113.12 on ICE.
Over the week, WTI tumbled 9.2% and Brent dropped 7.3%, but the two varieties of oil have gained more than 50% since the start of the year. Prices also suffered from new containments linked to covid-19 in China, which raise fears of sluggish Chinese demand. The strength of the dollar also weighed, by making purchases of raw materials more expensive, the prices of which are generally denominated in dollars. The dollar index has thus evolved in recent days to its highest levels for 20 years against a basket of currencies, including the euro, the yen and the pound sterling.
IEA sees still strong demand in 2023, and constrained supply
Despite a global supply still constrained by many factors (sanctions against Russia and Iran, lack of investment and local production problems), which is supporting oil prices, investors now fear that global demand will slow down. In its latest monthly report published on Wednesday, the International Energy Agency (IEA) is nevertheless still confident, and expects oil demand to rise 2% next year to a record 101.6 million barrels per day, exceeding its 2019 level, before the Covid crisis.
Chinese demand should be the driving force behind this increase, thanks to the relaxation of health restriction measures linked to Covid-19. According to the IEA report, “the Asia-Pacific region as a whole, accounts for three-quarters of the projected increase of 2.2 million barrels per day” in 2023.
Regarding OPEC+, “total annual supply could decline in 2023 with embargoes and sanctions affecting volumes from Russia and producers outside the Middle East who suffer from a further decline”, noted the IEA.
Rate hikes and signs of economic slowdown in the United States
The fact remains that economists, notably those of the IMF, the World Bank and the OECD have significantly revised down their forecasts for global growth for 2022 and 2023, due to the fallout from the war in Ukraine and the resurgence of covid- 19 in China. In the United States, the world’s largest economy, the latest macro-economic statistics have recently shown signs of weakness: falling retail sales and sluggish industrial production in May, slowing real estate market, plummeting household confidence in Junenot to mention warnings about corporate results, particularly in trade (Target) and technology (Microsoft, Snap).
Despite these alerts, the US Federal Reserve struck a blow on Wednesday by carrying out its largest key rate hike in 28 years. It raised the “fed funds” rate by 0.75 points to bring it between 1.5% and 1.75%, in response to inflation which soared to 8.6% in May and could reach 9 % in the coming months. The boss of the Fed, Jerome Powell, did not rule out a new gesture of the same magnitude in July, while ensuring that such sharp increases would not be “usual”. The Fed’s new projections now target a “fed funds” rate of around 3.4% at the end of 2022 and 3.8% at the end of 2023. Levels that more and more economists consider incompatible with the maintenance of growth. economic.
Fed’s “unconditional” commitment to fight inflation
If it does not envisage a recession at this stage, the Fed now expects only 1.7% GDP growth in the United States this year against 2.8% expected in March, and after a strong post-covid rebound of 5.7% in 2021. Growth should still be 1.7% in 2023 (against 2.2% expected in March) then 1.9% in 2024 (2% expected in March). However, Jerome Powell said Wednesday that he did not observe a general slowdown in the American economy, and assured that the Fed “was not trying to push the economy into recession”.
On Friday, in its semi-annual monetary policy report to Congress, the Fed affirmed its “unconditional” commitment to fighting inflation and restoring price stability. This term “hardcore” suggests that the Fed is willing to take the risk of causing a recession and that it believes that inflation out of control would have much more serious long-term negative effects on the economy.
In general, many central banks around the world have recently raised their key rates in order to slow inflation, including those of Canada, the United Kingdom, Switzerland, Brazil, Australia and ‘South Africa. The ECB is also moving towards a first rate hike in July. Japan is an exception, the Bank of Japan having reiterated its accommodating message on Fridaywith negative rates and continued asset purchases.