Oil prices fell in volatile trade on Friday as both gauges posted their biggest weekly declines in months, as fears of mounting recession dispel any supply shortages after weak economic data from China, Europe, and the US.
West Texas Intermediate (WTI) crude was down 44 cents to settle at a new low for 2022 at $71.02 a barrel. Brent crude was trading at $76.10 a barrel, down 5 cents.
Supply concerns are secondary to concerns about the economy. The market turns contango, signaling weak demand. The weak economic outlook in China, the US, and Europe is weighing on demand.
Oil prices gained some support in the early hours of the session and rose more than 1% after Russian President Vladimir Putin said the world’s largest energy exporter could cut production due to the ceiling price in crude oil exports.
However, a slightly higher-than-expected increase in US producer prices in November and news of a partial resumption of the Keystone Pipeline reversed those gains and pushed the benchmarks down by more than a dollar. Keystone closed earlier this week after a 14,000-barrel oil spill in Kansas.
A rise in oil prices could increase fears of an impending recession, making it more likely that the Federal Reserve will take an accelerating step in interest rate increases.
Both raw indicators reported weekly losses of around 10%. This was the biggest weekly drop for US WTI futures since April and for Brent since early August.
If WTI crude falls below $70 a barrel, it is likely to enter a free fall and hit $60 in the coming sessions.
The market structure for WTI contracts shifted to contango trading over the next year for the first time since November 2020, with short delivery contracts cheaper than a year later. Brent contracts also switched to contango trading for the next six months.
The contango market means less worry about the current supply situation due to weakening demand and encourages traders to stockpile.
Economists say rising COVID-19 infections in China will likely suppress economic growth over the next few months, even as some restrictions are eased.
Economists predict that the US economy will enter a short and shallow recession next year. Forecasters expect the US Federal Reserve to raise rates by 50 basis points (bps) on December 14.
According to a report from the US Department of Labor, the US producer price index (PPI) rose slightly more than expected in November due to the rise in service costs.
The European Central Bank will likely raise the deposit rate by 50 basis points to 2% next week, as the eurozone economy is believed to be already in recession.
