Oil Down 5%; Commodities Roiled by IMF Growth Downgrade, China and Recession Scare

© Reuters.

By Barani Krishnan

Investing.com -- Crude prices fell about 5% Tuesday, snapping a four-day rally, as commodities from oil to gold sold off after the International Monetary Fund slashed its world growth forecasts for 2022 and next year due to runaway inflation and other economic challenges caused by Russia’s invasion of Ukraine.

Reports that three people had died of Covid complications in China's financial hub Shanghai added to market fears about the pandemic potentially making a comeback in the world's second largest economy.

Growing fears of a U.S. recession as the Federal Reserve tries to thwart inflation with some of the most aggressive rate hikes in history also dampened sentiment in raw materials — which had seen huge price swings lately as investors tried to balance costs with what consumers could afford to pay.

Brent, the London-traded global benchmark for crude, settled down $5.91, or 5.2%, at $107.25 per barrel. It fell more than $6 earlier, to a session low of $106.81. 

New York-traded  West Texas Intermediate, or WTI, the benchmark for US crude, settled down $5.65, or 5.2%, at $102.56. The session low for WTI was $101.55. 

The two crude benchmarks had gained about 15% over four previous days of trading, rallying on expectations of a greater supply squeeze in Europe as Western nations mulled the possibility of a full import ban of Russian oil and gas to add to Moscow’s punishment over its role in the Ukraine conflict.

Prior to this week’s rally, Brent and WTI lost about 13% each over two cumulative weeks as China’s lockdown of Shanghai over Covid concerns sparked worries about oil demand in the world’s second largest importer of the commodity.

“With so much volatility in intraday oil prices, and extreme reactions to headline risks … I continue to expect that Brent will remain in a choppy $100 to $120 range, with WTI in a $95 to $115 range,” said Jeffrey Halley, head of research for Australia and Asia-Pacific at online trading platform OANDA.

The International Energy Agency has warned that roughly 3.0 million barrels daily of Russian oil could be shut in from May onward due to sanctions, or buyers voluntarily shunning Russian cargoes.

Russian oil output has continued to slide in April, declining by 7.5% in the first half of the month from March, the Interfax news agency reported on Friday.

Tuesday’s slump in oil came as the IMF said in an update of its World Economic Outlook that global gross domestic product, or GDP, will likely expand by only 3.6% this year and next. That was a downgrade of 0.8 percentage point and 0.2 percentage point, respectively, from the IMF’s previous GDP outlook published in December. 

World growth rebounded by around 6.1% in 2021 after the Covid-induced 4.9% slump in 2020.

The IMF did not only revise down its GDP outlook; it also raised its inflation expectations to an average of 5.7% this year across advanced economies, and 8.7% for emerging economies, citing inflation and other challenges from the Russia-Ukraine crisis.  That was  1.8 points and 2.8 points higher, respectively, from its previous inflation forecast.

“Economic damage from the conflict will contribute to a significant slowdown in global growth in 2022 and add to inflation,” the IMF said. “Fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries hardest.”

U.S. bond markets sold off, too, on Tuesday amid fear of a recession in the United States as the Fed plans to fend off inflation with some of the most aggressive rate hikes in its history. The yield on the U.S. 10-year Treasury note spiked for a fourth day in a row to December 2018 highs.  

After slashing rates to nearly zero at the height of the coronavirus outbreak, the Fed approved its first pandemic-era rate hike on March 16, raising rates by 25 basis points, or a quarter point. Many officials at the central bank have concluded since that the hike was too tame to rein in inflation galloping at 40-year highs. 

The Fed is considering as many as seven rate hikes this year and continuing them through 2023 until inflation drops to its target of 2% a year, from a current 8%. While most of its officials are considering up to half point rate increases a month, James Bullard, head of St. Louis Fed, has suggested a maximum three-quarter point increase to expedite the fight against inflation.

Bullard’s comments were one reason for Tuesday’s selloff in commodities, with gold dropping more than 1%, copper 2% and natural gas nearly 10% after the dollar, which determines pricing for most raw materials, hit two-year highs, impacting international demand for goods.