Oil prices extend losses on the uncertain economic outlook

Oil prices plummeted on Wednesday, extending losses from the previous day and WTI price dropped to the $68.3 per barrel level. If the WTI price declines, it may encounter support near $65 per barrel, while resistance may be found near $79.2 per barrel.

Oil prices continued to decline on Wednesday, as mounting economic risks reduced the oil demand outlook. Fears of a slowdown in the U.S. economy put pressure on oil prices. Recession concerns run high and aggressive rate hikes stifle economic activity, putting a lid on oil prices. US Treasury Secretary Janet Yellen in a letter to the US Congress warned that the office would not meet all US government obligations by June 1. Mounting fears of a US debt default drove oil prices down on Tuesday.

The Federal Reserve raised interest rates by 25 basis points at its monetary policy meeting on Wednesday, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%.   Market attention was primarily focused on the FOMC statement and press conference for forward guidance. The FOMC statement released after the 2-day meeting was dovish, providing support for oil prices. The US Central Bank has signaled that its hawkish policy is coming to an end, as prolonged tightening is putting the economy at risk and the recent turmoil in the banking sector has increased recession concerns. 

The potential of a banking sector meltdown has reduced the oil demand outlook, as recession concerns mount. First Republic Bank announced last week that its deposits fell 40% in the first quarter of this year and its stocks went into freefall. This raised an alarm in the banking sector, pushing oil prices down. First Republic collapsed on Monday but was bought by JPMorgan after US regulators invited other banking institutions to step in. On Tuesday, the stock prices of two more banks plunged. Fears of a banking sector meltdown are returning, diminishing the oil demand outlook.

Weak Chinese manufacturing data pushed oil prices this week. Chinese manufacturing PMI dropped to 49.2 for April from 51.9 in March, missing expectations of 51.4. Non-manufacturing PMI dropped to 56.4 in April from 58.2 in March versus 57.0 anticipated. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. 

Oil prices are supported by limited supply however, as OPEC+ producers recently decided to reduce output by 1.1 million barrels per day, to offset the drop in oil prices from the global banking crisis.

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Written by:
Myrsini Giannouli

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