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Oil prices drop on recession fears

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Written by:
Myrsini Giannouli

01 September 2022
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Oil prices dropped on Wednesday, with WTI testing the $90 per barrel support. If the WTI price declines further, it may encounter support near $82 per barrel, while resistance can be found near $98 per barrel and higher up at the $100 per barrel level. 

Risk sentiment waned last week, as hawkish Fed comments increased the odds of aggressive rate hikes. US Federal Reserve Chair Jerome Powell, in his much-anticipated speech at the Jackson Hole symposium last week, pointed to further economic tightening. 

On Wednesday, Fed rhetoric remained aggressively hawkish, with FOMC member Loretta Mester stating that she sees the Fed benchmark interest rate rising to 4% and no rate cuts through 2023. Severe rate hikes stifle economic activity fuelling recession fears. The global economic slowdown and recession concerns are decreasing the oil demand outlook, putting pressure on oil prices. 

Unrest in Iraq propped up oil prices earlier in the week. Fears over the country’s oil output have eased though after Iraq's government-owned oil company stated that unrest in Baghdad would not affect oil production.

Economic woes in China also push oil prices down, as China is the largest importer of crude oil and repeated Covid lockdowns have dampened oil demand. China’s weak economic outlook is raising concerns over the demand outlook for oil, pushing prices down.

Reports of an impending deal between the EU, aided by the US, and Iran are also adding pressure to oil prices. The EU has proposed to restore the 2015 Joint Comprehensive Plan of Action, effectively lifting sanctions on Tehran. If the deal goes through, it can add more than a million barrels of oil per day to the global market providing some relief to oil demand.

On the other hand, signals that OPEC may cut down oil output, boosted oil prices last week.  OPEC reportedly intends to cut down production to offset the return of Iranian barrels to oil markets. The organization may curtail oil production in the following months, to keep oil prices high.

WTI 1hr chart

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Written by:
Myrsini Giannouli

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