Oil prices drop on recession fears

Oil prices drop on recession fears

Oil prices dropped more than 1% in a volatile week as economic concerns and recession fears dogged global financial markets, outweighing supply concerns and geopolitical tensions in Europe.

By 0303 GMT, crude futures fell $1.25, or 1.2%, to $106.26 a barrel. WTI crude futures fell $1.24, or 1.2%, to $104.47 a barrel.

Oil prices are under pressure this week, along with global financial markets, on jitters over rising interest rates, the strongest US dollar in two decades, concerns over inflation and possible recession. The market has been affected by prolonged COVID 19 lockdowns in China's top crude importer.

Howie Lee, an economist at Singapore's Oversea Chinese Banking Corp, pointed out that strong U.S. consumer price index CPI data showed that recession concerns are drumming louder and taking oil lower this morning.

The US headline CPI for the 12 months to April went up 8.3%, confirming concerns that interest rates will need to rise quickly to tame it.

The market has been boosted by Russia's invasion of Ukraine, with prices rising over 35% so far this year. The European Union has a ban on oil from Russia, which is a key EU supplier of crude and fuels that could tighten global supplies, which is underpinning prices.

The EU is still trying to figure out the details of the Russian embargo. The vote needs unanimous support, but it has been delayed because Hungary opposes the ban because it would be too disruptive to its economy.

On Wednesday, oil prices jumped by 5% after Russia sanctioned 31 companies based in countries that imposed sanctions on Moscow after the Ukraine invasion.

Russian natural gas flows to Europe via Ukraine fell by a quarter, creating unease in the market at the same time. It was the first time that exports through Ukraine have been disrupted since the invasion.

Concerns about demand destruction in China have limited price gains, as it attempts to curb the spread of the coronaviruses.

Stephen Innes, managing partner at SPI Asset Management said that until we see some significant policy support coming through in China or policymakers adopt an alternative strategy to COVID, it's very unlikely that oil prices could be capped near term.

Commercial crude inventories in the United States rose last week because of a record release of oil from the U.S. strategic reserves, but gasoline stockpiles declined ahead of the peak summer driving demand season, the Energy Information Administration said on Wednesday.