Oil markets are sensing tensions around slowing global growth, an easing to the oil supply crunch, and an uncertain trajectory for China as it grapples with a Chine Covid zero policy.
Slowing global growth
If global growth continues to slow and a US recession is ahead that will reduce demand for oil. Although a US recession is not a ‘done deal’ Jerome Powell stated at the Semi-Annual testimony that it was a ‘possibility’. The lingering fear is that one of the consequences of the Fed fighting inflation so resolutely will be a sharp slow down in US growth that prompts a recession.
Easing oil supply crunch
There are some beliefs in the market that China and India are purchasing more Russian oil than the US previously believed. This takes some of the pressure off the oil market and can allow some of the bullish pressure to dissipate.
China’s Zero COVID policy
In case you are confused at to why China is holding onto its COVID Zero plan then you can read the good reasons here. However, this still means that If new infections flare up in China that demand can rapidly be reduced, further weakening oil prices
So, there are the main reasons that oil prices have pushed lower. However, traders should be aware that oil future markets remain in backwardation as ongoing supply issues can mean dip buyers step back in to steep oil declines. So, for now, oil is a key market to watch as a barometer for global recession fears as central banks embark on a fast tightening trajectory.
It’s not just oil flashing a global recession warning sign. Traders should also be aware that we are seeing similar warning signs in other commodity markets. Copper fell through 4$/lb and Iron Ore prices have been heavily pressured too over the last couple of weeks.