US Oil in Red for Second Week, First Since April on Recession Fears

© Reuters.

By Barani Krishnan

AiVIF.com -- U.S. crude prices fell for a second straight week despite a rebound on Friday, suggesting that recession fears could pose a greater challenge to oil bulls than thought despite typically busy summer travels that are good for the energy sector.

New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled up $3.35, or 3.2%, at $107.62 per barrel.

London-traded Brent crude, the global benchmark for oil, was higher by $3.07, or 2.8%, at $113.12.

For the week though, WTI showed a 1.8% decline, following through with the previous week’s 9.2% tumble.

It was the first time since April that WTI had posted back-to-back weekly losses. Prior to this, it had rallied non-stop seven weeks in a row.

Brent was flat on the week, ending exactly where it finished the previous Friday, after a prior weekly decline of 7.3%.

To be sure, WTI remains up 47% on the year after six months of gains through May while Brent shows an annual rise of nearly 45%.

Despite that and the optimism over summer travel, oil had buckled in the past fortnight “under the weight of recession fears and positioning,” said Scott Shelton, energy futures broker at ICAP (LON:NXGN) in Durham, North Carolina. 

“I feel like oil should be much higher than this but then again, I … recognize that most of the bulls are struggling and quite frankly out of patience in many cases due to volatility and nearly a $20 drop in a very short period of time,” added Shelton.

Just two weeks ago, WTI hit three-month highs of above $123 a barrel while Brent scaled similar peaks breaching $125.

Since then, the Federal Reserve, or Fed, has threatened to spoil the show for oil longs with the most draconian rate hike threats in a generation.

This month’s 75-basis point, or three-quarter point, rate increase is the central bank’s biggest in 28 years.

Some Fed bankers have advocated another 75-basis point hike for July. A more deterrent message against pricing pressures would be a 100-basis point, or full percentage point.

A combination of 50, 75 and 100 basis point hikes over the remaining four rate revisions for this year could help expedite the Fed’s aim of bringing inflation now raging at 40-year highs of above 8% back to the central bank’s target of just 2% per year.

Economists, however, fear that the Fed will push the economy into a recession with its quantum of hikes. The economy contracted by 1.4% in the first quarter of the year and will technically slip into a recession if it does not return to positive growth by the end of the second quarter.

U.S. consumer sentiment fell to a new record low in the latest reading of the University of Michigan’s closely-followed Consumer Sentiment index released on Friday. Consumer spending accounts for 70% of American gross domestic product, or GDP.

Despite all these, the American consumer has remained incredibly resilient in facing the worst inflation since the 1980s. US household consumption accounts for around 68% of aggregate expenditure even after gross domestic product declined 1.4% in the first quarter. This is the kind of strength, economists say, could help GDP tread water and avoid a recession in 2022.

Sales of new homes in the United States also jumped almost 11% in May from a month earlier, according to data on Friday from the Commerce Department that overshot economists’ forecasts and underlined the Fed’s difficulty in restraining demand in a sector contributing to runaway inflation.

On the oil front itself, gasoline stubbornly at around $5 a gallon hasn’t quite destroyed demand among U.S. drivers in the run-up to the country’s peak summer season for road trips.

It’s the same story with air travel despite higher ticket prices for fliers and costlier jet fuel for carriers.

American consumers spent $6.6 billion in February booking airline tickets during the spring break, according to data compiled by Adobe (NASDAQ:ADBE) Analytics. That was 6% higher than in February 2019, and up 18% from January of this year.

Through the first 15 days of May, spending by airlines rose 24% compared to 2019 while bookings were up only 3%. The gap between spending and bookings "highlights the effects of persistently high prices,” Adobe said.