Crude Tests $95 as Recession Fear, Rocketing Dollar Shake Root of Oil Rally By

© Reuters.

By Barani Krishnan

-- The oil bears have tasted blood, and they aren’t stopping.

U.S. crude futures tumbled another $4 to test the $95 per barrel support on Wednesday before settling off its lows, as pessimism from recession talk extended the selloff in oil for a second day in a row.

Brent, the global benchmark for crude, plumbed briefly below $100 a barrel the first time since April 25.

A rocketing dollar ahead of more rate hikes by the Federal Reserve has also shaken the roots of the energy rally seen since Russia's invasion of Ukraine in February and the resulting sanctions on Moscow. In minutes of its June policy meeting released on Wednesday, the Fed said it feared high inflation could become an entrenched feature of the U.S. economy and the only way to avert that would be appropriate interest rate hikes to balance price escalation with growth.

At Wednesday's settlement, WTI was down 97 cents, or almost 1%, at $98.53. The intraday low was $95.17. In just two sessions, the U.S. crude benchmark had lost almost $15 or 14%.

Brent settled at $100.69/bbl, down $2.08 or 2.02% after a session low at $98.59. Like WTI, Brent has also lost almost $15, or 13%, over two days of trading. 

Citigroup says WTI could collapse to $65 a barrel by the end of this year and slump to $45 by end-2023 if a demand-crippling recession hits. Technical charts studied by  suggest that a drop to $85 is possible before the end of July, and the challenge for WTI is to break below $92.40 first.

The Dollar Index, which pits the greenback against six major currencies, continued its ascent from overnight, leaping to above 107, its highest since December 2002. The dollar has rallied with few stops since November last year on bets of aggressive rate hikes by the Federal Reserve, or Fed, which has just started delivering on those expectations.

Oil’s latest move lower came as a closely-watched gauge of the US services sector fell to its lowest in 20 months in June, although it held up better than economists expected due to pressures from high costs for labor and other inputs.

Separately, the U.S. Labor Department signaled that the red-hot labor market may be starting to cool. Job openings, as measured by its monthly survey, fell in May, to a level of 11.254 million that is still high by historical comparison. The number was around a quarter of a million more than expected ahead of time, and the department also revised May's number substantially higher to 11.681 million.

The job openings data came ahead of Friday’s more important June nonfarm payrolls report, which is expected to show a smaller jobs growth compared with May. Economists tracked by say some 268,000 payrolls were probably added last month — versus the 390,000 in May — holding unemployment at 3.6% for a third straight month. A jobless rate of 4% or below is seen by the Fed as full employment.

“While our view remains that higher consumer prices are required to balance the oil market this summer, we acknowledge that significant and large shocks continue to distort fundamentals,” analysts at Goldman Sachs said in an energy market outlook.

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