Oil prices drop to 8-month low on recession fears amid monetary tightening measures

Oil prices fell sharply on Friday to hit an 8-month low as concerns about a potential recession continue to weigh on investors amid monetary tightening measures undertaken by central banks globally to rein in inflation as well as a strong dollar.

Brent, the benchmark for two thirds of the world's oil, slid 4.76 per cent to settle at $86.15. West Texas Intermediate, the gauge that tracks US crude, dropped 5.69 per cent to close at $78.74 a barrel. This is the first time since January that WTI has fallen below $80 per barrel. Both Brent and WTI recorded a fourth straight week of declines — the first time it has happened since December 2021. "The threat of a global recession continues to weigh on oil prices, with widespread monetary tightening over the last couple of days fuelling fears of a significant hit to growth," said Craig Erlam, senior market analyst at Oanda.

"Central banks now appear to accept that a recession is the price to pay for getting a grip on inflation, which could weigh on demand next year."

On Wednesday, the US Federal Reserve raised its key interest rate by 75 basis points, its third consecutive three-quarters-of-a-percentage-point increase, to slash surging inflation and restore price stability.

The move came after consumer prices rose by 8.3 per cent in August, exceeding economists' expectations of 8.1 per cent and above the Fed’s 2 per cent target.

The US central bank signalled further rate increases were possible, stating that it “anticipates that ongoing increases in the target range will be appropriate”. Meanwhile, the Bank of England also raised its base interest rate by 0.5 percentage points to 2.25 per cent on Thursday, vowing to “respond forcefully, as necessary” to soaring inflation.

The shift marks the seventh increase in a row and pushes the base rate to the highest level since the financial crisis in 2008.

The UK's central bank said it now expects a 0.1 per cent fall in gross domestic product over the current quarter, indicating that the economy is already in a recession.

The global economy is expected to slow down this year because of higher inflation, the continuing conflict in Ukraine, and Covid-19 pandemic-related restrictions in China.

In July, the International Monetary Fund lowered its growth forecast for the global economy to 3.2 percent this year, from its previous projection of 3.6 percent in April.

The World Bank has also slashed its 2022 growth forecast for the global economy, for the second time this year, to 2.9 percent, from 3.2 percent, while the Institute of International Finance lowered its estimate to 2.3 percent.

The US dollar, in which oil is priced, also hit a record high on Friday against major currencies, amplifying inflationary pressures and putting more pressure on the euro, sterling and the yen.

Last week, the International Energy Agency also cut its estimates for 2022 global oil demand growth during China lockdowns and a continuing slowdown in the Organisation for Economic Co-operation and Development area.

The Paris-based agency estimated global oil demand growth at two million barrels per day, marginally down from its 2.1 million bpd projection in August.

But the oil market remains tight amid supply constraints, with Russian President Vladmir Putin's move of calling up its army reserves in a “partial mobilisation” earlier this week also rattling the market.

The 23-member alliance of Opec+ producers agreed earlier this month to cut their October output by 100,000 bpd to support prices.

The group convenes again on October 5 to review and decide future output levels, but it could hold an emergency meeting if market dynamics changed, requiring it to intervene.

"The market still remains tight and Opec+ is perfectly willing to restrict supply further even as it fails to deliver on quotas it has set itself so far. What's more, a nuclear deal between the US and Iran looks no closer and Russia's mobilisation could pose a risk to its supply," Mr Erlam said.