Oil prices continued their downward spiral on Monday, driven by mounting fears of a U.S. recession and broader market selloffs. Despite concerns that escalating conflict in the Middle East could disrupt crude supplies, the negative sentiment surrounding global economic prospects overshadowed these geopolitical risks.
Brent crude futures dropped $1.07, or 1.4%, settling at $75.74 a barrel by midday GMT, marking prices close to their lowest since January. Concurrently, U.S. West Texas Intermediate (WTI) crude fell $1.18, or 1.6%, to $72.34 per barrel. The slide in oil prices followed a significant downturn in Asian share markets, where fears of a looming U.S. recession prompted investors to flee risk assets, anticipating that aggressive interest rate cuts might be necessary to revive economic growth.
"U.S. recession concerns stoked by Friday's weak July payrolls report only add to Chinese demand concerns that have been lingering in the oil market for some time," noted Warren Patterson and his team of analysts at ING in a client note.
The weak U.S. jobs data exacerbated worries about slowing economic growth, a sentiment already intensified by disappointing diesel consumption figures from China, the world's largest contributor to oil demand growth. European stock markets mirrored this trend, with Germany's DAX, France's CAC 40, Britain's FTSE, and Spain's IBEX 35 all declining by more than 2%.
Oil's year-to-date performance has notably lagged behind major stock indices. While the Nasdaq 100 has risen 11% and the FTSE 100 has gained 3% since January, Brent crude has seen a slight decline of 0.3%. This underperformance is also linked to the decision by the OPEC+ group to phase out voluntary output cuts from October, which is expected to increase supply later in the year.
"OPEC oil output rose in July despite production cuts by the group," a Reuters survey highlighted, indicating that the market could see increased supply pressures.
However, the oil price drop was somewhat cushioned by ongoing geopolitical tensions. Fighting in Gaza persisted over the weekend, following unsuccessful ceasefire talks in Cairo. Israel and the United States are preparing for potential escalation after Iran and its allies, Hamas and Hezbollah, vowed to retaliate against Israel for the recent killings of prominent leaders.
"The risk of a wider regional war, while still considered small, cannot be ignored," commented Tony Sycamore, an IG market analyst based in Sydney.
Market participants are also awaiting U.S. services data for July to gain further insights into the health of the world's largest economy. Sycamore added, "Another fall tonight would support the idea that the Fed is behind the curve."
In the United States, crude oil futures fell below $72 per barrel, hitting a six-month low amid the market selloff. The WTI September contract dropped to $71.92 per barrel, down $1.60 or 2.18%, effectively erasing its gains for the year. Similarly, Brent crude's October contract fell to $75.35 per barrel, down $1.46 or 1.9%, also putting it in the red for 2024.
Other energy prices followed suit, with RBOB gasoline and natural gas also experiencing declines. The gasoline September contract fell to $2.27 per gallon, down 4 cents or 1.99%, while natural gas dropped to $1.91 per thousand cubic feet, down 5 cents or 2.95%.
The recent economic data has painted a grim picture, with U.S. job growth falling short of expectations and the unemployment rate rising to 4.3%, its highest level since October 2021. This is compounded by the continued contraction of the U.S. manufacturing sector, which has now shrunk for four consecutive months.
Geopolitical risks remain high, particularly with Israel bracing for potential attacks from Iran following the assassination of Hamas leader Ismail Haniyeh. The U.S. and Israeli defense establishments are on high alert, anticipating possible retaliation that could further destabilize the region and impact oil supply chains.
