The price of WTI crude oil is trading below the $100 per barrel level this morning, marking the lowest level since April 2022. Yesterday, the price of oil fell by 8%.
The recent pullback in the price of black gold may be a consequence of growing investor fears that the global, and especially European, economy will fall into recession. Added to this are further restrictions related to new COVID-19 outbreaks in China, as well as the strongest US dollar in 20 years.
U.S. inflation data will be released today, which could reach 8.8 percent, which would mark the fastest price increase since 1981. However, core inflation is expected to fall for another month in a row from 6 to 5.7 percent. The peak of core inflation in the U.S. was in March, when it was 6.5 percent. However, it seems that the Federal Reserve is not going to change its plans for another 75-basis-point interest rate hike, which in turn could increase fears of a recession and put pressure on oil prices.
Another potential drag on the market could have been the API report, which showed that crude oil inventories rose by 4.76 million barrels last week. Distillate and gasoline stocks rose by 3 and 3.3 million barrels, respectively.
OPEC estimates that oil demand will increase in 2023, but at a lower rate than in 2022. This may be supported by an expected recovery in the economy from a slowdown or recession in 2022 and an improvement in the coronavirus outbreak in China. Moreover, this week, US President Joe Biden may push for increased production from Saudi Arabia, on the occasion of a planned visit to the country, to lower crude prices.
A drop in oil prices, but also in other commodities, including industrial metals, may favor lower inflation expectations. This, in turn, could cause the market to talk more and more about a potential pause in the Fed's monetary tightening efforts. Should this actually happen, some financial markets could catch their breath, after a disastrous first half of the year.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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