Oil enters another 'bear market' over China lockdowns and recession fears

Wed 13 Jul 22, 11:04am (AEDT)
Bear Market - Brown bear, ursus arctos, looking from behind the tree in spring nature. Large predator hinding in green forest. Big mammal standing in woodland
Source: iStock

Key Points

  • Oil has extended its recent selloff, now down -21% from mid-June highs
  • Recession risks, China's covid outbreak and inflation angst is weakening the near-term outlook for oil prices
  • OPEC and the IEA reiterate a tight supply and solid demand narrative heading into 2023

Oil has entered ‘bear market territory’, defined as an arbitrary -20% fall from recent highs.

Oil is down -21% from mid-June highs, now trading at a 3-month low on the back of renewed lockdown risks in China, growing European recession fears and another wave of omicron variants. The surging US dollar is adding further insult to injury, viewed as a headwind for most commodity prices.

2022-07-13 10 29 54-UKOIL 2022-07-13 10-25-03.png ‎- Photos
Brent crude oil (Source: TradingView)

Oil rolls over

There’s plenty of reasons to be bearish on oil, at least in the near-term. 

New restrictions are being rolled out in China after the BA.5 omicron subvariant was detected in Shanghai, placing the financial hub at risk of a second lockdown.

Investors are showing growing angst over tonight’s US CPI print, which economists forecast to accelerate to 8.8% in June (from 8.6% in May). Hotter-than-expected inflation could force another round of super-sized interest rate hikes from the Fed, placing the economy at further risk of a recession. 

Inflation nerves has prompted hedge funds to reduce exposure in commodity markets, according to ZeroHedge. 

“The volatility in commodity markets increases the stakes for putting money to work,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management, adding that “the decimation of other commodities has also reduced risk appetite for crude even in a supply-constrained market.”

OPEC remains bullish

OPEC forecasts world oil demand to trend higher next year, but at a slightly slower rate than 2022, boosted by better covid containment measures in China and still solid consumption from major economies. 

In the monthly report, the top 10 OPEC producers pumped 24.8m barrels per day (bpd) of oil in June, falling 1m bpd short of targets.

The report signals that more production is desperately needed, though most OPEC members are already pumping at or near full capacity. 

IEA warns worst of energy crisis ‘yet to come’

IEA Executive Director Fatih Birol said that “the world has never witnessed such a major energy crisis in terms of its depth and its complexity,” at the global energy forum in Sydney. 

“We might not have seen the worst of it yet ... this is affecting the entire world.”

Birol pointed to OPEC’s July report, which suggests no relief from the supply squeeze. 

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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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