Oil Prices Increase Slightly Amid China and Recession Concerns, Challenging Memorial Day Demand Predictions

By Barani Krishnan

Crude oil prices experienced fluctuations throughout Monday, initially rising before reversing course to close with little change. Concerns regarding an impending economic slowdown in the U.S. and potential recession overshadowed optimism for increased demand leading up to the Memorial Day holiday, which traditionally marks the start of the peak driving season in the United States.

West Texas Intermediate (WTI) crude for July delivery ended slightly up at $110.29 per barrel, rising by over $1.60, or 1.5%, at one point during the session. Conversely, another measure showed WTI falling by $1.10, or 1%.

Brent crude futures for August delivery settled at $110.78 per barrel, marking an increase of 79 cents, or 0.8%.

Market analysts attributed Monday’s subdued performance largely to China’s restrained oil demand coupled with fears of a slowing U.S. economy. Craig Erlam from the online trading platform OANDA highlighted that while the reopening of Shanghai could support oil prices, recession fears are currently hindering any significant rally. He emphasized that the ongoing cost-of-living crisis, exacerbated by higher oil prices, will likely impact demand negatively.

International Energy Agency chief Faith Birol noted that China’s demand for oil is crucial, suggesting it could significantly influence crude price trends for the remainder of the year. He expressed hope that a weak Chinese demand might prevent major disruptions in oil markets during the summer.

The annual meeting in Davos brought global economic threats to the forefront, with some participants warning of a potential worldwide recession. International Monetary Fund Managing Director Kristalina Georgieva acknowledged that while she doesn’t foresee a recession in major economies, she could not dismiss the possibility either.

These economic concerns overshadowed expectations for increased demand leading into the Memorial Day weekend. Atlanta Federal Reserve President Raphael Bostic pointed out that the true impact of the Ukraine conflict on prices has yet to be felt, indicating further upward pressure on industrial inputs may be approaching. He suggested that the Federal Reserve may need to undertake significant rate hikes in the coming months to manage inflation.

Having contracted by 3.5% in 2020 due to the pandemic, the U.S. economy rebounded with a 5.7% growth in 2021—the fastest rate since 1982. However, inflation has surged alongside economic growth, with some indicators showing annual increases as high as 8.5%.

Since the beginning of the year, U.S. growth has declined, with a negative 1.4% growth recorded in the first quarter, largely driven by inflation spikes in food and energy attributed to the Russia-Ukraine crisis. If economic growth does not recover in the second quarter, the U.S. would technically enter a recession, defined as two consecutive quarters of negative growth.

The Federal Reserve’s target inflation rate is set at 2% annually. Following a period during which rates were held near zero due to the pandemic, the Fed raised rates by a quarter-point in March and an additional half-point in May. Officials have indicated potential further hikes, likely two more half-point increases in the following months, as they assess the impact on the economy. Some policymakers have even proposed a more aggressive rate increase to tackle inflation more swiftly.