Oil prices down 3% with recession fears in focus
Oil prices dropped by approximately 5% to an eight-month low on Friday, as the U.S. dollar reached its strongest level in more than 20 years and concerns grew that rising interest rates could push major economies into recession, reducing oil demand.
Brent futures fell $4, or 4.4%, to $86.46 per barrel, while U.S. West Texas Intermediate (WTI) crude dropped $4.45, or 5.3%, to $79.10.
This decline pushed both benchmarks into technically oversold territory, with WTI on track for its lowest close since January 10, and Brent headed for its lowest close since January 13.
It marked the fourth consecutive week of declines for both benchmarks, the first time this has occurred since December. Both were now in technically oversold territory, with WTI on course for its lowest settlement since January 10 and Brent on track for its lowest since January 14.
U.S. gasoline and diesel futures also experienced drops of more than 5%.
On Wednesday, the U.S. Federal Reserve raised interest rates by 75 basis points. Central banks worldwide followed with similar hikes, increasing concerns about potential economic slowdowns.
“Oil prices plummet as global growth concerns reach a tipping point, with central banks aggressively fighting inflation. It seems they are prepared to maintain their aggressive stance, which will dampen economic activity and lower short-term crude demand,” said Edward Moya, senior market analyst at OANDA.
The U.S. dollar was on track for its highest close against a basket of other currencies since May 2002. A stronger dollar typically weakens oil demand, as it makes oil more expensive for buyers using other currencies.
“We saw the dollar surge, which dragged down dollar-denominated commodities like oil, coupled with mounting fears of a global recession due to central banks’ rate hikes,” noted John Kilduff, partner at Again Capital LLC in New York.
A survey indicated that the euro zone’s business activity downturn worsened in September, signaling a looming recession as consumers cut spending and governments urge energy conservation following Russia’s reduction of European energy supply.
Wall Street’s major indexes fell by more than 2% on Friday, with investors worried that the U.S. Federal Reserve’s hawkish approach to controlling inflation could trigger a recession and hurt corporate earnings. The dollar index reached its highest level in over two decades, further pressuring oil prices.
Meanwhile, Russia initiated referendums to annex four occupied regions of Ukraine, escalating the stakes of the war, which Kyiv described as a “sham.”
On the supply side, negotiations to revive the 2015 Iran nuclear deal have stalled, as Tehran demands the closure of U.N. nuclear watchdog investigations, a senior U.S. State Department official revealed. This has lowered expectations of a resurgence in Iranian crude oil exports.