By Barani Krishnan
Investing.com -- The back-and-forth recession story in oil made a stunning lurch forward on Tuesday as crude tumbled more than $10 a barrel, whipping bulls just settling in from post-holiday languor.
The dollar’s jump to two-decade highs on expectations of aggressive Fed rate hikes also incentivized selling in oil, which tends to attract less buying from non-U.S. entities when the value of the greenback surges.
The Dollar Index, which pits the greenback against six major currencies, leapt 1.5% to above 106.5 points, its highest since December 2002. The dollar has rallied with few stops since November last year on bets of aggressive rate hikes by the Federal Reserve, or Fed, which has just started delivering on those expectations.
New York-traded West Texas Intermediate, or WTI, settled down $8.93, or 8.2%, at $99.50 per barrel, just below the key bullish mark of $100. It fell to an intraday low of $97.47 earlier. WTI did not trade on Monday as U.S. markets were closed for the 4th of July Independence Day holiday. The U.S. crude benchmark had finished June down more than 7%.
London-traded Brent crude, the global benchmark for oil, settled down $10.73, or 9.5%, at $102.77 per barrel after an intraday low of $101.14. Brent rose 1.7% in the previous session. It lost nearly 6% in June, after holding steadily near $120 for weeks since scaling almost $140 in March.
“We’ve been warning longs in the market for a while not to get too cushy with $120 oil with all this recession talk going around,” said John Kilduff, partner at New York energy hedge fund Again Capital. “Today is proof that the recession story is only going to go forth, and with stunning velocity. Of course, there’ll be pullbacks in the narrative from time to time. So, welcome to a new era of volatility as well.”
The drone of recession talk is expected to get louder across the United States after the Atlanta Federal Reserve’s forecast of a second straight quarter of economic decline for the year.
Wednesday’s minutes from the US central bank’s June meeting will give investors some insight into how policymakers see the future path of interest rates as markets remain focused on the prospect of a recession.
The Fed is expected to push ahead with another 75 basis point rate hike at its upcoming July meeting, but the path for September is less clear.
Deepening worries about a recession are weighing on the demand outlook for oil despite tight supply concerns and prospects of U.S. job gains in June.
June’s nonfarm payrolls are expected to have slowed from May, but remaining in solid, positive territory. Economists tracked by Investing.com say some 268,000 payrolls were probably added last month — versus the 390,000 in May — holding unemployment at 3.6% for a third straight month. A jobless rate of 4% or below is seen by the Fed as full employment.
Economists say the United States may be witnessing the beginnings of a real economic shakedown, only that it’s been too numb to notice because of the miraculous resilience of its consumers insulated by two years of pandemic aid money; a housing market still running on old stimulus energy; and stock markets often coming back after a few days of selloffs.
But U.S. consumers won’t be superheroes forever and the slide into the economic abyss could come faster than thought, warn analysts.
“I think the market is caught between two narratives,” Scott Redler, partner with T3Live.com, said in comments carried by CNBC. “I don’t know if it wants good news or bad news. At first, the hot economic news was bad because the Fed could go another 75 basis points and keep going, but now the market wants softer news. But is the landing going to be soft or hard? It’s like threading the needle right now.”
In oil markets especially, the prospect of a recession has created more two-way price action in recent weeks, preventing any unsustainable surges in the price of crude even as China reopened from COVID shutdowns and an oil workers’ strike in Norway loomed.