Oil Buckles as Recession Angst Rattles Commodity Investors

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(Bloomberg) — Oil plunged more than 6% for the second time in less than a week as concerns grow that a global economic slowdown will ultimately hobble demand.

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West Texas Intermediate futures tumbled as much as 7% to below $102 a barrel. Investors are worried about the impact of sharply higher US interest rates, with Federal Reserve Chair Jerome Powell due to testify before Congress Wednesday on his bid to curb the fastest pace of inflation in decades. Raging prices are likely to crimp economic growth across the world, with UK inflation at a four-decade high.

Crude’s spike since Russia’s invasion of Ukraine in late February has also brought a liquidity crisis in the oil market as investors are required to put down more cash to cover their trades. Futures holdings are at the lowest since 2016, leaving headline prices prone to outsized swings. WTI also fell below its 100-day moving average early on Wednesday for the first time since January, adding technical pressure to an already fragile market.

Still, despite crude oil’s sharp moves, refined-fuel markets have remained robust. US President Joe Biden will call for a gasoline tax holiday, a person familiar with the plan said, after the average US retail price topped $5 a gallon this month following a surge of more than 50% in 2022.

“Broader macro influences have been dictating price direction for oil recently,” said Warren Patterson, head of commodities strategy at ING Groep NV in Singapore. “However, fundamentally, the market still remains constructive. The oil balance is set to be tight for the remainder of the year, while in the shorter term, strong refinery margins should be supportive for crude demand.”

Wednesday’s slide comes alongside other commodities also losing ground, as well as some risk assets. Copper and iron ore declined, as did equities. An additional headwind for crude prices came from a rising dollar, which makes imports more costly for holders of other currencies. Citigroup Inc. said that it expects further declines in oil into the end of the year, but added that it’s set to be a volatile downtrend.

“Investors should remember that Fed-induced slowdowns are simply a short-term abatement of the symptom — inflation — and not a cure for the problem — underinvestment,” Goldman Sachs Group Inc. said in a note.

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