Oil Struggles Against Recession Fear; U.S. Crude Climbs But Brent Down

© Reuters.

By Barani Krishnan

AiVIF.com -- Oil bulls are discovering that the Russia-OPEC driven crude rally isn’t immune after all to talk of a U.S. recession.

Since the Feb. 24 invasion of Ukraine, even in the weeks leading up to that, longs in crude have behaved as though supply disruptions are the only thing that matters to energy prices — not demand.

The presumption has shaped their indifference to any discussion on the potential impact to oil demand from the worst inflation in America in 40 years. China’s debatable actions in clamping down on new Covid breakouts in the world’s largest oil importing country had also fueled skepticism toward any selloff in oil.

This week as well, oil bulls dug their heels in as talk of demand destruction gained momentum from gasoline retailing at record highs of nearly $4.50 per gallon and diesel at well above $6 in U.S. pumps. After a two-day slide of almost 10%, crude still managed to pull back half of those losses in just one session — Wednesday.

But the laser-focus of macro investors at the same time on the Fed’s tightening actions and whether that could ultimately do the economy in returned to haunt the oil market on Thursday.

After spending the first half of the session in the negative and the second higher, the two crude benchmarks settled the day mixed and little changed. But more important perhaps was the gnawing feeling that crude longs could no longer summarily dismiss the negative impact of inflation-recession talk.

“Oil prices remain a volatile trade as the crude demand outlook grows more uncertain,” said Ed Moya, analyst at online trading platform OANDA. “Inflation remains uncomfortably high and has accelerated global growth concerns. The risk-off tone on Wall Street is leading to a much stronger U.S. dollar which is weighing on oil prices.”

New York-traded West Texas Intermediate, or WTI, the benchmark for U.S. crude, settled up 42 cents, or 0.4%, at $106.13 after falling as much as $3 earlier in the session.

Brent crude, the London-traded global benchmark for oil, settled down 6 cents, or 0.01%, at $107.45 a barrel after rallying by more than $1 earlier. 

While many energy traders remain fixated over the EU’s potential ban on Russian crude, fear of disruptions from that seems to be losing momentum, Moya said.

Soaring pump prices and slowing economic growth are expected to significantly curb the demand recovery through the remainder of the year and into 2023, the International Energy Agency cautioned on Thursday.

“In this market environment, oil will struggle if China moves forward with city-wide lockdowns,” Moya said, adding that longs in crude will have to hope that summer U.S. road trips and flights and cruises hold up the demand picture.

Economists fear that the U.S. economy, finally on the path to resilience after the damage wrought by the two-year long coronavirus pandemic, could head for negative growth again from the Fed’s rate hikes.

The Producer Price Index, or PPI, which measures what retailers pay for goods at the wholesale level, rose 11% in the year to April, after an 11.2% rise in the 12 months to March, the Labor Department said on Thursday.

A day earlier, the department reported that the Consumer Price Index, or CPI, expanded 8.3% in the year to April — versus 8.5% rise in the 12 months to March — as fuel and food prices stayed near record highs.

Prior to PPI and CPI readings, the Personal Consumption Expenditure Index, or PCE, which is closely followed by the Fed, rose by 5.8% in the year to December and 6.6% in the 12 months to March.

The Fed, whose own tolerance for inflation is a mere 2% per year, has been alarmed by these numbers and is determined to bring the PPI, PCE and CPI  readings back to benign levels.

To do this, officials at the central bank are debating the viability of a 75-basis point interest rate hike in June, after the 50-bps and 25-bps increases at their May and March meetings, respectively. A 75-bps hike would represent the largest upward adjustment in rates since 1994.

Fed Chair Jerome Powell has also indicated that a total of seven rate hikes — the maximum allowable under the central bank’s calendar of meetings this year — were on slot for 2022, and more could follow in 2023, until a return to the annual 2% inflation rate is achieved.