Oil climbs but posts third weekly loss on recession fears and looming rate increases

The US Federal Reserve could raise rates by 75 basis points to 100 bps to tame inflation, which is at a 40-year high

An oil pump jack in Texas. The US does not plan to refill its Strategic Petroleum Reserve any time soon. Reuters

Oil prices climbed on Friday after plunging on Thursday due to mounting concerns about a global recession and an expected increase in interest rates set for next week.

Brent, the benchmark for two thirds of the world’s oil, settled 0.56 per cent higher at $91.35 a barrel at the end of trading on Friday, while West Texas Intermediate, the gauge that tracks US crude, closed up 0.01 per cent at $85.11 a barrel.

Both benchmarks fell more than 3 per cent on Thursday after the US Department of Energy said plans to restock the nation’s emergency supply did not include a trigger price, which is any oil price below which the administration will start to buy crude.

The department said that transactions were not likely to happen until after the 2023 fiscal year.

Oil prices are down about 20 per cent since early June and posted a third consecutive weekly loss, due to a strong US dollar and as markets await an interest-rate increase from the US Federal Reserve after the latest data showed headline inflation exceeded expectations.

Crude prices also weakened this week after the International Energy Agency lowered its estimates for global oil demand growth in 2022 to two million barrels a day, from an earlier 2.1 million bpd forecast, due to renewed Chinese coronavirus lockdowns and a continued slowdown in the Organisation for Economic Co-operation and Development (OECD) area.

That has amplified concerns about a global recession and waning fuel demand as investors await the outcome of the Fed meeting when the US central bank meets next week.

"It's been another volatile week for oil prices, with global growth fears dampening the demand outlook but Opec+ sitting in the background ready to respond if prices drop too far," said Craig Erlam, a senior market analyst at Oanda.

"Brent crude remains above $90 at the moment which may stop the alliance from calling one of the emergency meetings it warned of but if growth fears continue to rise, that may change."

Before the latest inflation data that showed consumer prices rose by 8.3 per cent in August, above analysts' expectations of 8.1 per cent, the Fed was expected to raise interest rates by 75 basis points for a third straight month.

Hasnain Malik, head of Equity Research at Tellimer, said higher-than-expected US inflation “implies greater rate increases and US dollar strength, which is negative for most emerging markets”.

“Despite earlier rate hikes in many emerging markets compared with developed markets, negative real rates in most countries imply there is much further to go,” he said.

“Real rates — policy rate minus inflation — measure how ahead or behind the inflation curve is a central bank.”

Some analysts have said that it may decide on a supersize rate increase of 100 bps as it attempts to tame inflation, which is at a four-decade high.

“Oil fundamentals are still mostly bearish as China’s demand outlook remains a big question mark and as the inflation-fighting Fed seems poised to weaken the US economy,” said Edward Moya, a senior market analyst at Oanda.

The clarification by the US Department of Energy that the restocking of the Strategic Petroleum Reserve (SPR) won’t happen due to prices falling at a certain level and that they won’t take action until after the 2023 fiscal year “tentatively removed any support crude had just ahead of the $80 a barrel level”, Mr Moya said.

“Despite all the doom [and] gloom across the world, the oil market remains tight and prices should outperform all the other commodities.”

Earlier this week, Opec kept its forecast for global oil demand for this year unchanged despite headwinds from rising inflation and interest rates, as well as the war in Ukraine.

Opec said world oil demand growth remained pegged at an increase of 3.1 million bpd for 2022, while for 2023, the forecast for world oil demand growth remains unchanged at 2.7 million bpd.

“Traders have started to believe Opec needs to do more to control supply if it wants to keep oil prices higher,” said Naeem Aslam, chief market analyst at AvaTrade.

Under the current supply, there are “chances that prices will continue to move lower, and we could see crude oil prices easily reaching near the $75 price mark”, Mr Aslam said.

Earlier this week, Abu Dhabi Commercial Bank said the Opec+ 23-member alliance of producers could take further steps to cut output if oil prices remain under pressure.

ADCB cited the meeting of Opec+ earlier this month in which the alliance indicated it would stand ready to hold an unscheduled meeting to address market developments, even before the planned October 5 meeting, if necessary.

At its last meeting this month, the alliance agreed to cut its October output by 100,000 bpd, reverting to August production levels, to mitigate downward price pressure in the face of a slowing global economy, potential demand headwinds and the possible revival of the Iran nuclear deal, which could bring more crude to the market.

Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman said the group's “decision is an expression of will that we will use all of the tools in our kit”.

He also said the group would “be attentive, pre-emptive and proactive in terms of supporting the stability and the efficient functioning of the market”.