(Bloomberg) — Oil extended its drop below $100 a barrel as fears of a global slowdown outweighed continued supply disruptions and market tightness.
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West Texas Intermediate fell as much as 4.4% with Brent dropping below $100 a barrel. The international benchmark dropped more than $10 on Tuesday, its third-largest ever in dollar terms. Meanwhile, Citigroup Inc.’s Ed Morse said the outlook for oil demand will likely see further downward revisions amid higher fuel prices.
“Almost everybody has reduced their expectations of demand for the year,” Morse said in a Bloomberg Television interview Wednesday.
Oil has opened the third quarter on volatile footing. With central banks including the Federal Reserve hiking interest rates to tame inflation, investors have been pricing in the consequences of a slowdown, even as physical crude markets continue to show signs of vigor and the war in Ukraine drags on.
While the drop was borne out of concern of a global recession and technical selling, there’s been little change to market fundamentals. Nearby Brent futures are trading at a giant premium to later months — indicating market strength — while disruption to global oil production has been mounting, amid a risk to Kazkahstan’s oil exports.
“While the odds of a recession are indeed rising, it is premature for the oil market to be succumbing to such concerns,” Goldman Sachs analysts including Damien Courvalin said in a note. “The global economy is still growing, with the rise in oil demand this year set to significantly outperform GDP growth.”
A strengthening dollar has also been a headwind for commodities this week, as a gauge of the US currency rallied to the highest level in more than two years, with investors shying away from risk. A rising dollar makes raw materials like oil more expensive for holders of other currencies.
Tuesday’s selloff wasn’t just pressuring nearby prices — the entire futures curve slumped. Brent for December 2023 shed almost $8 a barrel in the rout. Even so, markets still remain heavily backwardated.
Still, in China there are signs of rising demand as the world’s biggest importer emerges from virus lockdowns. Overall consumption of gasoline and diesel last month was at almost 90% of June 2019 levels, according to people with knowledge of the energy industry.
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