Recession Fears Push US Oil Prices Below $100; Awaiting Inventory Data

By Barani Krishnan

U.S. crude prices have fallen below the $100-per-barrel support level for the second time in two weeks, closing under this threshold on Tuesday.

Once again, oil bulls are looking towards the upcoming weekly U.S. inventory data in hopes of driving the market upward.

Brent crude, the international benchmark for oil, saw a decline of $3.48, or 3.3%, settling at $102.46 per barrel, after hitting an intraday low of $101.73. Following a two-week rally of 6% fueled by speculation around a potential European ban on Russian oil, Brent has since dropped by 9% this week, primarily due to concerns that aggressive interest rate hikes by the Federal Reserve might lead the U.S. into a recession, amidst the fastest inflation growth in four decades.

The focus on Tuesday shifted notably to U.S. crude. West Texas Intermediate (WTI), the benchmark for U.S. crude, closed down $3.33, or 3.2%, at $99.76, after touching a session low of $98.91—the lowest point since April 26.

After gaining nearly 8% over the past two weeks, WTI has lost around 10% in the first two days of the current week. The drop in crude prices coincided with a report from the American Automobile Association, indicating that gasoline prices at U.S. pumps reached an all-time high of $4.37 per gallon.

During this time, central bank officials from the Federal Reserve are deliberating a potential 75-basis point rate hike in June, following increases of 50 and 25 basis points during their May and March meetings, respectively. Such hikes would mark the steepest interest rate increases in decades as the Fed aims to tackle soaring prices reminiscent of the 1980s.

Gasoline prices dipped as low as $4.07 in April after the Biden administration authorized the unprecedented release of crude oil from the Strategic Petroleum Reserve (SPR) to alleviate global supply issues exacerbated by sanctions on Russia.

President Biden authorized the first major withdrawal from the SPR in November as oil supplies tightened amid a resurgence in post-pandemic demand, driving up both crude and fuel prices. Over the past two months, the administration has released an average of 3 million barrels weekly from the SPR to meet domestic refinery demands in a market characterized by increased fuel consumption following the economic recovery from the pandemic.

Starting this month, the administration’s largest SPR releases will occur, totaling 180 million barrels over the next 180 days—about one million barrels per day. Recent reports indicated that SPR inventories fell to 550 million barrels by late April, the lowest level since December 2001.

Despite WTI’s drop from 14-year highs of $130 to under $100, gasoline prices have remained stubbornly above the $4 mark, leading President Biden to accuse energy companies of price manipulation.

“There’s clearly a huge amount of worry about a recession in the markets at present as central banks continue to tighten policy amid a slowing economy and rising living costs,” stated Craig Erlam, an analyst at OANDA. “There’s significant pressure on household finances, which is likely to increase as the year progresses.”

However, the resistance of OPEC+ to increase oil production is keeping prices "very elevated," Erlam noted, suggesting that high prices may become the norm.

Market participants eagerly awaited U.S. weekly oil inventory data, expected to be released after the market closed Tuesday by the American Petroleum Institute (API).

This report will provide preliminary figures on U.S. crude, gasoline, and distillates for the week ending May 6, serving as a precursor to official statistics from the Energy Information Administration on Wednesday.

Analysts expect the EIA to report a draw of 457,000 barrels for the previous week, in contrast to the 1.3-million barrel increase noted for the week ending April 29. For gasoline, the forecast anticipates a reduction of 1.57 million barrels, building on a prior week’s decline of 2.23 million barrels.