Topline
Oil prices continued to fall in choppy trading on Wednesday—extending recent losses as growing recession fears wreak havoc on markets, but despite concerns about an economic downturn hurting demand, most experts remain optimistic that prices will rebound by later this year.
Key Facts
The price of U.S. benchmark West Texas Intermediate slid nearly 2% to trade at around $98 per barrel, while international benchmark Brent crude now sits at just over $100 per barrel.
The price action on Wednesday comes a day after both contracts posted their worst daily declines since March, with WTI falling below $100 per barrel for the first time in around two months.
Experts have largely attributed the selloff to growing recession fears, but many argue that nothing has yet fundamentally changed with regards to high demand and low supply globally.
Many Wall Street firms still expect prices to rebound by later this year, with the likes of Barclays, Goldman Sachs, UBS and RBC all predicting oil will trade at between $110 and $130 per barrel by the end of 2022.
Even so, “almost everyone has reduced their expectations of demand for the year,” Ed Morse, Citi’s global head of commodity research, told Bloomberg in an interview on Wednesday, a day after the firm warned oil could fall to as low as $65 per barrel.
While prices are expected to rebound by later this year, the outlook for next year is slightly more gloomy, with several firms predicting oil will fall below $100 per barrel in 2023.
Crucial Quote:
Analysts at Goldman Sachs, meanwhile, say that recent declines have been “overshot” since global supply remains tight. “While risks of a future recession are growing, key to our bullish view is that the current oil deficit remains unresolved, with demand destruction through high prices the only solver left as still declining inventories approach critically low levels.”
Tangent:
The recent price action—with both contracts trading in near 15-dollar ranges, “hints more at panic and forced liquidation than a structural change in the tight supply-demand situation globally,” according to Jeffrey Halley, senior market analyst at Oanda. Other experts agree: “It doesn’t seem like the oil supply situation is about to undergo any dramatic shifts imminently,” adds Vital Knowledge founder Adam Crisafulli.
Key Background:
Despite recent declines, oil prices have still jumped over 10% this year—peaking at nearly $140 per barrel in early March after Russia’s invasion of Ukraine. Prices have been falling since early June, however, with markets hard-hit by rising recession fears in recent weeks. Less than a month ago, the S&P 500 Energy sector was up over 65% for the year, but since then “energy stocks have come crashing back down to earth” amid the recent drop in oil prices, according to Bespoke Investment Group. “The one sector that has been a bright spot for the market is probably not making too many investors happy these days.”
Further Reading:
Warren Buffett Adds To Massive Stake In Occidental Petroleum, Buying The Dip After Oil Prices Drop (Forbes)