Oil prices continued to fall on Friday, posting a fourth straight week of declines and falling to their lowest level since January amid growing concerns that a looming economic downturn will hurt global demand in energy markets.
The price of U.S. benchmark West Texas Intermediate fell about 5% to $79 a barrel, hitting its lowest point since January amid growing recession fears. Meanwhile, international benchmark Brent crude fell below $87 a barrel, also on track for its lowest close since January.
Both WTI and Brent crude were in technically oversold territory, notching a fourth week of declines on Friday and their worst losing streak since last December.
Widespread fears of a recession weighed on energy prices but also hit the stock market recently as the S&P 500 and Dow Jones Industrial Average slipped back into bear market territory on Friday. Both major indexes also set new lows for the year amid a widespread selloff.
The continued strength of the US dollar, which is considered a safe-haven asset, also contributed to the drop in oil. The ICE US Dollar Index, which tracks the greenback against a basket of other currencies, rose nearly 1% to its highest level since 2002.
The Federal Reserve raised interest rates by 75 basis points on Wednesday for the third consecutive policy meeting, as central banks around the world did the same in announcing rate hikes. Concerns about global economic growth “have hit panic mode due to the chorus of central bank pledges to fight inflation,” says Edward Moya, chief market analyst at Oanda.
“Central banks are poised to remain aggressive in raising rates, which will weaken both economic activity and the short-term outlook for oil demand,” he describes, adding, “the dollar rally is poised to enter another level that could keep pressure on commodities. .”
The S&P 500 energy sector fell more than 6% on Friday, its worst day since May and adding to losses in recent weeks. Still, the sector has far outperformed the benchmark S&P 500 this year (down 23%) and is up more than 20% thanks to a surge in oil prices earlier this year.
However, some investors may be looking to cash in now that oil prices have fallen back to earth. “Not only are there concerns about consumption given the rising risks of a recession, but it’s a pretty crowded space with a lot of edgy appetites sitting on healthy annual gains that they’d like to lock in,” says Vital Knowledge founder Adam. Crisafulli.
Still, many experts remain cautiously optimistic about long-term oil price growth. They warn that as sanctions on Russian energy tighten during the ongoing war in Ukraine, global supplies could be further constrained. As a result, many of Wall Street’s biggest banks are predicting a recovery in prices during the fourth quarter of this year, especially if steady demand and low inventories continue.
“Despite all the bearishness hitting oil prices, economic activity is not falling off a cliff,” Moya asserts. He predicts that if the persistent selling continues next week, WTI could soon fall to $74 a barrel.
“Oil prices are certain to come under renewed upward pressure as the European Union prepares to implement its sanctions against Russian oil in the coming months,” said Mark Zandi, chief economist at Moody’s Analytics. While some of Russia’s EU oil imports will be diverted to other countries, “filling the void in oil supplies could prove difficult, at least early enough to avoid a debilitating spike in prices,” he adds.