Oil prices edged higher on Wednesday after plummeting overnight due to demand concerns and fears of a global recession as the International Monetary Fund downgraded the growth rate of the world's largest economy.
Brent, the benchmark for two thirds of the world's oil, fell about 7 per cent to below $100 a barrel but rebounded on Wednesday and was 0.89 per cent higher at $100.7 a barrel at 1.28pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 0.88 per cent at $96.68 a barrel after plunging 8 per cent.
Crude prices slumped as Opec said in its monthly outlook report it expects oil demand to exceed supply by about 1 million barrels a day in 2023.
"Traders are concerned about the sharp increase in the Covid-19 cases in China, and the worry is that this could lead to a lockdown," said Naeem Aslam, chief market analyst at Avatrade.
"In addition to this, traders are worried about economic slowdown around the globe, and higher inflation readings are increasing the chances for a strong possibility of a recession taking place despite a robust job market."
World oil demand is expected to exceed pre-pandemic levels in 2022, but the Russia-Ukraine war, pandemic-related developments and inflationary pressures are posing headwinds.
Higher commodity prices and supply chain disruptions are exacerbating inflation as well as increasing economic uncertainty and growing fears of a global recession.
On Tuesday, the IMF downgraded its US economic growth forecast to 2.3 per cent this year, from an earlier 2.9 per cent projection last month and cut the country's 2023 outlook for 2023 to 1 per cent compared with previous 1.7 per cent estimate. The fund warned that the surge in inflation, which reached 9.1 per cent in June, posed 'systemic risks' to the US and global economy.
The World Bank and the IMF lowered their growth forecasts for the global economy this year as a result of Russia’s military offensive in Ukraine and the Covid-19 pandemic.
The World Bank forecasts the global economy will grow 2.9 per cent this year lower than the 3.2 per cent projection it issued in April, while the International Monetary Fund expects it to grow 3.6 per cent, down from its previous 4.4 per cent estimate in January.
"The oil market looks stuck ... in a state of limbo, trying to determine whether it is indeed about to loosen substantially as a pending recession will ravage demand or whether, as cautioned by Fatih Birol, the executive director of the IEA, the world will move into an unprecedented 'major energy crisis in terms of its depth and its complexity'," said Edward Bell, senior director of market economics at Emirates NBD.
Growing uncertainties about the global economic outlook, the Russia-Ukraine conflict and underinvestment in the energy industry in a tight market have all contributed to oil price volatility.
"The disconnect between the real world, and the speculative world, is growing wider and although I don’t rule out more downside surprises, I believe the recent selloff could be getting a little overdone," said Jeffrey Halley, senior market analyst at Oanda.
"Brent crude has had these ranges up and down in three of the past six trading sessions, showing just how skittish the short-term trading market is ... more downsides could occur, just as easily as a sharp rally could."
