Oil futures: Brent slumps 9% on recession fears, dollar index soars to 20-year high

5 Jul 2022

Quantum Commodity Intelligence - Crude oil futures came under huge selling pressure Tuesday amid further inflationary and recession fears, as the US dollar soared to fresh multi-year highs on expectations of further steep rate hikes in the US and Europe. 

Front-month September ICE Brent futures were trading at $103.05/barrel (1907 GMT), the lowest since April, compared to the day's range of $101.10-$114.75/b and Monday's settle of $113.50/b.

At the same time, August NYMEX WTI was trading $99.73/b, versus Friday's settle of $108.43/b, falling below $100/b for the first time since May and hitting a low of $97.43/b. There was no Monday settlement due to the US holiday.

The dollar index in late-afternoon European trading was riding at 20 year highs of around 106.70 points, up 1.5% on the day.

At the same time, the euro dropped to its lowest level in two decades on fears of a recession in the euro zone, with gas prices soaring and the Ukraine war showing no signs of abating. The euro shed around 1.5% for the session to hit $1.025 against the dollar by late-afternoon in Europe.

"The S&P Global Final Composite PMI fell to 52.0 in June, down from 54.8 in May. This points to a slowdown in business activity, on top of a decline in manufacturing and weaker activity in the services sector,,” said Kenny Fisher, market analyst at Oanda, noting inflation continues to hurt consumer spending.

Oil prices had been been riding high earlier in the session as supply concerns initially outweighed economics. 

"Constructive oil fundamentals continue to counter the weakening macro environment at the moment," said Warren Patterson, head of ING's commodity research, also cautioning over the deteriorating macroeconomic picture.

"A key factor behind the constructive view of the oil market is the inability of OPEC to significantly increase output," added Pattison, noting the latest survey had OPEC missing output targets by 120,000 bpd in June, averaging 28.6 million bpd.

US President Joe Biden is scheduled to visit Saudi Arabia later this month, with OPEC spare capacity and future production hikes likely on the agenda.  

Oil traders were also eyeing European gas markets, as benchmark TTF prices hit a near four-month high on Monday as Norway announced industrial action, while ongoing shortfalls from Russia were seen potentially boosting demand for gasoil in the form of oil-to-gas switching.

European crude initially found some support as gasoline cracks rebounded from a six-week low Monday after a fire at Equinor's Mongstad refinery took out the reformer unit in Norway's only refinery, although diesel cracks cooled.

Meanwhile, Saudi Aramco set the August OSP for its flagship Arab Light grade for Asia at Dubai/Oman +$9.30/b, just short of the all-time high, with sharp increases across the board.  

In terms of forecasting, JP Morgan flagged an extreme case for oil reaching $380/b if the US and European curbs compel Russia to inflict retaliatory crude output cuts, whereas Citibank maintained its bearish outlook.

"Two crude oil headlines highlighting the kind of market uncertainty we can expect during H2-22: JPM warns of sky-high crude (if Russia cuts exports) Citi warns oil may collapse to $65 by year-end on recession," commented Ole S Hansen, Head of Commodity Strategy at Saxo Group.