Crude Oil Declines as Recession Fears Impact Demand Growth

By Peter Nurse

Oil prices dropped on Thursday due to concerns about a potential recession, ongoing COVID-19 lockdowns in China, and the ongoing conflict in Eastern Europe impacting global demand.

As of 9:10 AM ET, futures were down 0.6%, priced at $105.11 per barrel, while the contract fell 1% to $106.44 per barrel.

The decline in oil prices this week is largely attributed to fears that increasing interest rates aimed at controlling inflation will significantly hinder global economic growth, possibly pushing certain regions into recession.

Data released earlier on Thursday indicated that GDP growth in the UK for the first quarter was below expectations at 0.8%, with preliminary figures suggesting a 0.1% decline in March. This marks the UK as the first G7 nation to present its first-quarter GDP results, raising concerns about similar outcomes in other countries moving forward.

China, the world’s largest crude oil importer, is grappling with extended COVID-19 lockdowns, while the strongest U.S. dollar in two decades has also exerted downward pressure on the oil market.

In light of these factors, the organization responsible for oil production has revised its forecast for global oil demand in its May report. It now anticipates a growth of just 3.4 million barrels a day this year, down from a previous estimate of 3.7 million barrels per day. This suggests a significant slowdown in demand growth from the first to the second quarter; while first-quarter demand increased by 5.2 million barrels a day, it is expected to drop to 2.8 million barrels a day in the current quarter.

Additionally, the international energy agency issued its report and moderated earlier statements that anticipated a "global supply shock" due to reduced output from Russia, which has been impacted by sanctions. However, it still cautioned about possible consequences for demand.

The agency stated, “Soaring pump prices and slowing economic growth are expected to significantly curb the demand recovery through the remainder of the year and into 2023.” It also mentioned that "extended lockdowns across China… are driving a significant slowdown in the world’s second-largest oil consumer."

On the supply side, the European Union has yet to finalize details regarding a proposed embargo on Russian oil, facing resistance from Hungary, which relies heavily on supplies from Moscow. Analysts noted that Hungary has indicated it will only support the ban if there is an exemption for Russian pipeline oil flows. Should such an exemption occur, it could substantially diminish the effectiveness of the embargo, given that the Druzhba pipeline supplies are approximately 1 million barrels per day, constituting a significant portion of the 2.3 million barrels per day the EU imported from Russia in 2021.