U.S. oil just tumbled below $100 a barrel — What that says about recession fears and tight crude supplies

“Massive speculation on demand destruction story” led to Tuesday’s “spectacular decline,” Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch.

WTI oil futures on Tuesday fell below the key $100 mark, with the front-month August contract
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+1.44%

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tapping a low of $97.43 a barrel on the New York Mercantile Exchange, the lowest intraday level since April, FactSet data show. On Tuesday, it settled at $99.50, down $8.93, or 8.2%.

The price drop was “inevitable as the market rebalances after fears of sanctions give way to the realities of Russian sales to new buyers in Asia, and the impact of high prices on demand and the economy become increasingly apparent,” said Michael Lynch, president at Strategic Energy & Economic Research.

Even so, he doesn’t expect to see WTI prices below $90 in the next few months — “unless supply proves strong from Libya, Iran and/or Venezuela, which is possible but there’s little prospect of upwards pressure on prices any time soon.”

Bargain prices?

WTI’s drop on Tuesday marked a nearly 20% drop from the highs above $123 a barrel in mid-June.

The market is approaching bear territory, with the day’s settlement just over 19.5% lower than the recent settlement high of $123.70 from March 8. To be in a bear market, WTI oil would need to settle at or below the $98.96 to mark a 20% or more drop from the recent high, according to Dow Jones Market Data.

Still, Velandera’s Raj believes oil prices have “dropped too fast, too soon, creating a unique buying opportunity for physical oil traders,” as the “supply picture looks bleak at best, and disastrous at worst.”

Raj points out that high U.S. gasoline prices this year, which hit levels above $5 a gallon at the retail level, “have yet to put a dent in American drivers’ thirst for oil” and in the past, mild recessions have “not shown material demand reductions.”

Velandera’s analysis, meanwhile, shows that the oil supply-demand balance has only gotten worse each month this year, and supply has been declining while demand has been rising, said Raj. “Ironically, the market has only become tighter, with further bad news coming out of Libya and Norway.”

Political instability has led to significant declines in Libyan oil production, while Norway is dealing with a strike among oil and natural-gas workers.

The International Energy Agency, in a monthly report issued in June, said it expects supply growth to lag behind demand next year, pushing the market into a 500,000 barrels-a-day deficit.

Recession worries

Meanwhile, analysts at Citigroup said that in a recession scenario, global benchmark Brent crude prices could drop to $65 a barrel by year-end, and $45 by the end of 2023, “absent intervention by OPEC+ and a decline in short-cycle oil investment.”

A fall to $65 would mark a sizable decline from current levels, with September Brent crude
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settling at $102.77 a barrel on ICE Futures Europe, down $10.73, or nearly 9.5% on Tuesday.

“What seems clear is that the market is finally pricing in recession risk” and traders have reduced long positions, said James Williams, energy economist at WTRG Economics.

He pointed out that recent data from the Energy Information Administration show that the four-week averages for implied demand for gasoline and distillates were down 2% and 7.4%, respectively.

“I think a recession is approaching a certainty, and recessions always lead to lower prices,” said Williams.