Oil prices plunge on recession fears amid monetary tightening

Oil prices fell sharply on Friday as worries about a possible recession continue to weigh on investors amid monetary tightening measures taken by central banks around the world to contain inflation as well as a strong dollar.

Brent crude, the benchmark for two-thirds of the world’s oil, was trading down 4.68% at $86.23 a barrel as of 9 p.m. UAE time. West Texas Intermediate, the gauge that tracks U.S. crude, fell 5.44% to $78.95 a barrel. This is the first time since January that WTI has fallen below $80 a barrel.

“The threat of a global recession continues to weigh on oil prices, with widespread monetary tightening over the past two days fueling fears of a hit to growth,” said Craig Erlam, senior market analyst at Oanda.

“Central banks now seem to accept that a recession is the price to pay for bringing inflation under control, which could weigh on demand next year.”

On Wednesday, the US Federal Reserve raised its key rate by 75 basis points, its third consecutive hike by three-quarters of a percentage point, to reduce soaring inflation and restore price stability.

The move came after consumer prices rose 8.3% in August, beating economists’ expectations of 8.1% and the Fed’s 2% target.

The US central bank has signaled that further rate hikes are possible, saying it “expects continued increases in the target range to be appropriate.”

Meanwhile, the Bank of England also raised its base interest rate by 0.5 percentage points to 2.25% on Thursday, pledging to “react forcefully, if necessary” to the surge in the economy. ‘inflation.

The change marks the seventh consecutive increase and pushes the base rate to the highest level since the 2008 financial crisis.

The UK’s central bank said it now expects gross domestic product to fall 0.1% in the current quarter, indicating the economy is already in recession.

The global economy is expected to slow this year due to rising inflation, continued conflict in Ukraine and COVID-19 pandemic restrictions in China.

In July, the International Monetary Fund lowered its growth forecast for the global economy to 3.2% this year, down from its previous projection of 3.6% in April.

The World Bank also cut its 2022 growth forecast for the global economy, for the second time this year, to 2.9% from 3.2%, while the Institute of International Finance lowered its estimate to 2.3%.

The U.S. dollar, in which oil is valued, also hit a record high on Friday against major currencies, amplifying inflationary pressures and putting further pressure on the euro, pound and yen.

The International Energy Agency last week also cut its estimate of global oil demand growth in 2022 amid lockdowns in China and a continued slowdown in the Organization for Economic Co-operation and Development area. .

The Paris-based agency estimated global oil demand growth at two million barrels a day, slightly down from its projection of 2.1 million bpd in August.

But the oil market remains tight amid supply constraints, with Russian President Vladmir Putin’s decision to call up his army reserves during a “partial mobilisation” earlier this week also rattled the market.

The 23-member alliance of OPEC+ producers agreed earlier this month to cut its October output by 100,000 bpd to support prices.

The group is meeting again on October 5 to review and decide on future production levels, but it could hold an emergency meeting if market dynamics change, forcing it to intervene.

“The market still remains tight and OPEC+ is perfectly willing to further restrict supply even if it fails to meet the quotas it has set itself so far. The United States and Iran do not seem closer and Russia’s mobilization could pose a risk to its supply,” Erlam said.

Updated: September 23, 2022, 5:13 p.m.