Prices lower as limited oil supply battles recession worries

Oil prices edge lower as the market weighs a limited supply against recession worries.

The world's largest economy has contracted for a second consecutive quarter. On an annualised basis between April and June, the US recorded a 0.9% decline in output despite economists previously forecasting an increase of 0.5%. Nonetheless, this downturn is yet to be officially labelled a recession.
The early data regarding the US’s recent economy would meet the international criteria for a recession as the first quarter also saw a contraction of 1.6%. However, the US has an official arbiter of recessions: the National Bureau of Economic Research. The NBER is yet to make such a judgement. They define a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators".

Typically, recessions lead to decreased demand in the market and this reduction would be likely to lower fuel prices. In addition, the dollar would be expected to drop in value, which would also traditionally help to cut the cost of oil. Unfortunately, the current constrained global oil supply, caused by Russia being effectively taken out of the market, means that prices are expected to remain high for the foreseeable future. The economic tug of war between recessionary fears and low oil supply is creating some oil market volatility.
"It certainly feels like we are back in trade-off mode again, where sentiment is shifting between recessionary risks in H2 and a fundamentally undersupplied market," said Stephen Innes, managing partner at SPI Asset Management.

Oil producers have now retracted the supply cut of a record 9.7 million barrels per day (BPD) that was previously agreed, which has helped to soften oil prices. The now-cancelled cut was announced back in April 2020, when the COVID-19 pandemic dramatically reduced demand. However, the surge in demand since then has rendered it unsustainable.

The results of the meeting taking place on 3rd August will have a huge impact on which way the market swings. Attending the meeting will be the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, who are together called OPEC+. They are expected to keep the output fixed, rather than introducing an increase that would assist the US.


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