Oil drops to lowest since January – which is why experts say low prices won’t last

Oil drops to lowest since January – which is why experts say low prices won’t last

Oil prices continued their decline on Friday, posting the fourth consecutive week of declines and falling to their lowest level since January amid growing concerns that a looming economic slowdown will hurt global demand in energy markets.

The price of the US West Texas Intermediate Index fell nearly 5% to trade at $79 a barrel, hitting its lowest level since January amid mounting recession fears. Meanwhile, international benchmark Brent crude has fallen below $87 a barrel, also on track for its lowest close since January.

Both WTI and Brent were technically oversold, recording a fourth straight week of declines on Friday and representing the worst consecutive losing streak since last December.

Broad-based recession fears have been weighing on energy prices but have also hit the stock market recently, with the S&P 500 and Dow Jones Industrial Average plunging into bear market territory on Friday. Both major indicators also set a new low for the year amid a broad sell-off.

The continued strength of the US dollar has contributed to the decline in oil prices, which are considered a safe asset. The ICE US Dollar Index, which measures the dollar against a basket of other currencies, rose nearly 1% and reached its highest level since 2002.

With the Federal Reserve raising interest rates by 75 basis points for the third consecutive policy meeting on Wednesday, central banks around the world have been doing the same by announcing rate hikes. Edward Moya, chief market analyst at Oanda, says global economic growth fears “has been put into a panic by a raft of central bank commitments to fight inflation”.

He describes, β€œCentral banks are poised to remain aggressive as interest rates rise and this will weaken both economic activity and the demand outlook for crude oil in the short term,” adding that β€œa stronger dollar is about to enter another level that could keep pressure on commodities.”

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The S&P 500 Energy Index fell more than 6% on Friday in its worst day since May, adding to losses in recent weeks. However, the sector has far outperformed the benchmark S&P 500 index this year (down 23%), rising more than 20% thanks to higher oil prices earlier this year.

But some investors may now be looking to cash in as oil prices fall to the ground. says Adam, founder of Vital Knowledge Crisavoli.

However, many experts remain cautiously optimistic about the long-term rise in oil prices. They noted that with the tightening of sanctions on Russian energy amid the ongoing war in Ukraine, global supply may be further limited. As a result, many of the largest banks on Wall Street expect prices to rebound during the fourth quarter of this year, especially if steady demand and low inventories continue.

β€œDespite all the downside hitting oil prices, economic activity is not coming off the cliff,” Moya says. He predicts that if continued selling continues into the next week, WTI could soon drop to $74 a barrel.

β€œOil prices are sure to come under renewed upward pressure as the European Union prepares to implement its sanctions on Russian oil in the coming months,” says Mark Zandi, chief economist at Moody’s Analytics. While some EU imports of Russian oil will be diverted to other countries, “filling the oil supply vacuum may be difficult, at least soon enough to avoid a debilitating price jump,” he adds.

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