U.S. Recession Fears Put Oil Prices On Course For Significant Weekly Drop

Fears of a slowdown in the U.S. economy have pressured crude oil prices, setting them for what could end up being their worst weekly performance in five weeks.

The slide began on Wednesday and accelerated on Thursday, after Federal Reserve chairman Jerome Powell said the U.S. central bank would continue with its rate hikes as a means of controlling inflation, signaling these hikes will be large and possibly more frequent than the ones deployed so far.

“If – and I stress that no decision has been made on this – but if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell told the House Financial Services Committee.

That statement had unpleasant implications for the oil market. First, the suggestion that the Fed plans to hike interest rates means the economy is not doing as well as many hoped and might do even worse if faster rate hikes become necessary.

Then there is the problem with the hikes themselves, which many fear would make matters worse instead of better, increasing the risk of an actual recession, since the hikes make borrowing more expensive, prompting people and companies to reduce their spending on everything from mortgages to production expansion and consumer goods.

A recession would also mean lower demand for oil, so it is no wonder that traders reacted with a selloff after Powell’s statement to Congress, with West Texas Intermediate diving below $80 per barrel and Brent crude sliding to less than $82 per barrel.

At the time of writing, Brent was trading at $80.94 per barrel and WTI was trading at $74.92 per barrel.

The direction oil prices have taken may yet change later today when the weekly U.S. jobs report comes out, but it looks like whatever bullish news the day might produce would be hard-pressed to reverse the overall weekly decline that the prospect of a U.S. slowdown has spurred.

Source: https://oilprice.com/