Oil prices fall below $100 per barrel on global recession fears: Will it dip further?

NEW DELHI: Oil prices could fall as low $65 a barrel by year end and potentially hit $45/bbl by end-2023 if a recession hits developed economies like the US and Europe, with rising unemployment, household and corporate bankruptcies, warned Citigroup in a research report. In a recession, surpluses of energy typically build up, forcing sellers to cut prices sharply to sell their product.
The outlook is based on an absence of any intervention by OPEC+ producers and a decline in oil investments.
The benchmark Brent crude is trading at $99.41 per per barrel at present, after shooting up to $128 in early March because of the Ukraine war. It was prevailing at around $97 a barrel before Russia’s invasion of Ukraine. Investors have sold oil positions on worries that aggressive interest rate hikes to stem inflation will spur an economic downturn that will hit oil demand.
"For oil the historical evidence suggests that oil demand goes negative only in the worst global recessions. But oil prices fall in all recessions to roughly the marginal cost...the historical evidence suggests that most downturns are accompanied by demand slowdowns," noted the report.
Citi analysts, led by Francesco Martoccia, said in a note that they expect oil prices to fall by the end of 2022 as supplies hold up but a global economic slowdown causes demand to cool. Citi predicted that Russian exports would increase by the end of the year as India and China have started snapping up the country's oil.
Fears are growing that some of the world's biggest economies will tumble into a recession as central banks such as the Federal Reserve raise borrowing costs in an effort to stamp down on inflation.
Many major economies will enter recessions over the next 12 months amid tightening government policies and rising living costs, pushing the global economy into a synchronized growth slowdown, according to Nomura Holdings Inc. The brokerage expects the euro zone, the UK, Japan, South Korea, Australia and Canada to fall into recession along with the US.
But Citi's projections sharply contradict the forecasts JP Morgan who said oil prices could reach a “stratospheric’’ $380 per barrel if sanctions results in Russia resorting to retaliatory crude output cuts. A 3 million-barrel cut to daily supplies would push benchmark London crude prices to $190, while the worst-case scenario of 5 million could mean “stratospheric” $380 crude, the analysts wrote.
The Group of Seven rich nations are considering imposing a price cap on Russian oil in an effort to keep oil flowing and curb inflation, while still limiting revenue to Moscow for the war on Ukraine that it calls a "special military operation".
“The most obvious and likely risk with a price cap is that Russia might choose not to participate and instead retaliate by reducing exports,....It is likely that the government could retaliate by cutting output as a way to inflict pain on the West. The tightness of the global oil market is on Russia’s side.”
Though the European nations and the US have cut energy imports from Russia due to the sanctions, India continues to import given the steep discount offered by Moscow.
According to Motilal Oswal Financial Services, the world oil demand is projected to average 100.3 million barrels per day (mb/d), approximately 0.1 mb/d higher than 2019.
“Crude oil markets were gripped with many factors — recession, demand destruction, supply disruptions and rock bottom spare capacity to name a few. It looks like volatility is here to stay in oil markets for a good period of time.”
“The longer-term outlook for oil also remains bullish as Russia’s production is falling faster than expected and a lot of it may be lost irreversibly... The global oil market remains in a structural deficit and would need much higher prices to regain its balance, as Chinese demand is already recovering and on the other hand, Russian oil production could fall another 0.5 million barrels per day,’’ the brokerage observed.
Meanwhile, Russia’s oil exports rose back above $20 billion in June despite lower shipments abroad because of a rally in energy prices, according to the International Energy Agency. That was an increase by $700 million from a month earlier, even as Russia’s daily exports of crude-oil and products fell by 250,000 barrels to 7.4 million barrels, the lowest since August, the IEA estimated in its monthly report published on Wednesday.
According to estimates compiled by Bloomberg., analysts expect Brent crude to end the year at around $101 a barrel.
With inputs from Agencies