The risk of the global economy slowing further and falling into negative growth territory has risen sharply in recent months. So much so that oil prices lost about a quarter of their value in the third quarter after rising sharply in the first two quarters of the year.
It seems that was just the beginning. Now, the UN is warning that a recession is imminent, and oil traders are selling their position and fleeing a market that could see a positive development very soon, as OPEC+ is expected to accept the largest production cut since 2020.
The United Nations Conference on Trade and Development released a report this week blaming monetary tightening for an impending recession that will lead to worse global stagnation than the 2008 financial crisis and the pandemic.
“According to the report, rapid interest rate increases and fiscal tightening in advanced economies, combined with cascading crises resulting from the COVID pandemic and the war in Ukraine, have already turned a global slowdown into a recession, the desired soft landing appearing unlikely,” UNCAD said in a statement.
“During a decade of extremely low interest rates, central banks have consistently fallen short of inflation targets and failed to generate healthier economic growth. Any belief that they will be able to lower prices on the basis of higher interest rates without generating a recession is, according to the report, an unwise bet.
The oil market is already in a state of emergency to adapt to the new danger. According to Reuters’ John Kemphedge funds and other institutional traders have been net sellers for 10 of the past 16 weeks, reducing their positions in the most traded oil contracts by a combined 237 million barrels since June.
Further reflecting growing fears of a third-quarter recession, Kemp’s figures showed institutional traders trimmed their long-term bullish positions in oil to a ratio of 3.61-to-1 from 6.68-to-1 in June.
Meanwhile, OPEC+ is tightening the reins in response to that sentiment, planning to cut crude output substantially at its next meeting, which takes place in Vienna on Wednesday.
Related: Trade giants expect robust oil demand despite recession fears
“OPEC ministers are not going to come to Austria for the first time in two years to do nothing. So there’s going to be a cut of a historic kind,” Dan Pickering of Pickering Energy Partners Told CNBC this week.
Indeed, reports suggest a cut of more than a million bpd in production, although some analysts have noted that the actual cut could be lower, with the official figure referring to OPEC+ production quotas rather than to actual production. The organization has been significantly below its quotas in recent months, with the gap between quotas and actual production widening to 2.85 million bpd in August.
Yet, due to the OPEC+ cut, analysts are virtually certain that oil prices will rebound, possibly sharply, by the end of the year, despite recession fears.
“Oil reservoirs as global growth concerns shift into panic mode given a chorus of central bank pledges to fight inflation. It looks like central banks are poised to stay aggressive with rate hikes, which will weaken both economic activity and the near-term outlook for crude demand.” Edward Moya, Oanda Analyst Told Reuters last month.
This week, oil won 5 percent on the first trading day of October thanks to OPEC+ cuts, with Goldman now seeing Brent at $105 a barrel by the end of the year and WTI at $95 a barrel.
This suggests something that was already clear last year. The fundamentals may fade for a while, but they always come back to claim their role in shaping oil prices. The danger of a recession certainly has negative implications for oil demand growth, but in a tight supply environment, the price outlook invariably swings from bearish to bullish, even if what brewing is the worst recession in decades.
By Irina Slav for Oilprice.com
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