The IMF’s warning of a looming recession is supported by trends in major economic powerhouses.
The price of oil worldwide dropped by 4% on Wednesday, with investors pointing to weak demand and a volatile economy as factors, reported Reuters.
Brent future crude contracts fell by 43 cents to 81.67 dollars a barrel and US crude dropped 39 cents to 76.54 a barrel in one day, as the International Monetary Fund also warned of a looming recession in 2023.
“Warning signs of global recession, China’s lacklustre recovery with surging Covid-19 cases, renewed strength in the US dollar and dampened risk sentiment are all catalysts keeping oil prices in check overnight,” Yeap Jun Rong, Market Analyst at IG told Reuters.
The drop in prices come as China faces a mass spread of Covid-19 cases that was triggered by the scrapping of its ‘Zero Covid’ approach.
The Chinese government had calculated the impact Covid would have by signalling focus outwards. It had increased export quotas for refined oil products by nearly half according to a Chinese-based consultancy, widely seen as a move to capture export margins in an environment of slow domestic demand.
Importantly, there is an opportunity to mitigate Russian diesel exports, after sanctions that take effect on February 5.
Saudi Arabia is also planning to cut prices of its crude-grade oil in Asian markets by February as it saw 10-month low prices.
The kingdom would be competing with Russia, as Moscow finishes up its plan to divert its oil from Europe to Asia. Russia has suffered from price caps and sanctions in Europe that have forced it to be a top supplier for China and India.
Saudi’s crude OSP decision to cut prices is expected to heavily affect the trend for Iranian, Kuwaiti, and Iraqi prices.
The IMF’s warning of a looming recession is supported by trends in major economic powerhouses in Europe, East Asia, and the Americas that are experiencing weakening economic activity.
“The market remains worried about the impact of macro factors such as the economic downward pressure,” analysts from Haitong Futures told Reuters.
Meanwhile, countries like the US have continued to raise interest rates. Such an intense rate increase is expected to slow down the economy, and spending and in turn affect fuel consumption.
On the other hand, the dollar weakened for the first time in months this week, which is likely to increase demand for oil as dollar-based commodities and futures become cheaper for traders using other currencies.
Gas prices falling
Natural gas prices have also stabilised after the invasion of Ukraine reflecting the success of Europe in finding alternative sources of supply and a notably milder winter.
On Tuesday, the wholesale price for European natural gas, measured by the benchmark Dutch T.T.F. futures contract for February, was selling for around 81 dollars a megawatt-hour. On the eve of Russia’s push into its neighbour last February, the contract sold for about $93 and peaked at $360 in August reported the New York Times.
The United States, Qatar, and other exporters were largely responsible for this security. A number of gas-receiving facilities have been built from the Netherlands to Germany in the past year and they are almost ready.
Consumers have also cut down consumption by roughly 20 percent due to high prices, government urging, and a calmer winter temperature.
An uncertain future?
Despite falling prices and alternate sources, the ban on Russian oil taking effect in a month is still expected to increase prices, especially in the transportation industry.
Additionally, the fall in wholesale gas prices will be unlikely to bring immediate relief to consumers and businesses with high energy bills as utility providers buy their supplies and arrange contracts in advance through hedging programmes.
Experts believe it may take months of persistently low prices for the effects to work through to users’ bills.