Oil steadied around $100 a barrel, with Goldman Sachs Group Inc. arguing that a plunge driven by fears a recession will hurt demand was overdone.
West Texas Intermediate rose 0.8%, while Brent added 1.5%. Those gains were small compared to Brent’s decline of more than $10 on Tuesday, its third largest ever in dollar terms.
While that drop was borne out of concern of a global recession and technical selling, there’s been little change to market fundamentals. Nearby Brent futures are trading at a giant premium to later months — indicating market strength — while disruption to global oil production has been mounting, amid a risk to Kazkahstan’s oil exports.
Oil has opened the third quarter on a volatile footing as concerns about a potential recession rattled financial markets. With central banks including the Federal Reserve jacking up interest rates to tame inflation, investors have been pricing in the consequences of a slowdown even as physical crude markets continue to show signs of vigor and the war in Ukraine drags on.
“While the odds of a recession are indeed rising, it is premature for the oil market to be succumbing to such concerns,” Goldman Sachs analysts including Damien Courvalin said in a note. “The global economy is still growing, with the rise in oil demand this year set to significantly outperform GDP growth.”
A strengthening dollar has also been a headwind for commodities this week as a gauge of the US currency rallied to the highest level in more than two years, with investors shying away from risk. A rising dollar makes raw materials like oil more expensive for holders of other currencies.
Tuesday’s selloff wasn’t just pressuring nearby prices. The entire futures curve fell sharply, with only two Brent contracts now trading above $100 a barrel. Brent for December 2023 shed almost $8 a barrel in the rout.
Still, in China there are signs of better oil consumption as the world’s biggest importer emerges from virus lockdowns that pummeled demand. Overall consumption of gasoline and diesel last month was at almost 90% of June 2019 levels, according to people with knowledge of the energy industry.
“Prices will march higher once we get past this current bout of risk-off,” Wayne Gordon, commodity and Asia Pacific currency strategist at UBS AG Wealth Management, told Bloomberg TV. “We’ve seen a number of issues in North Africa, we’ve seen OPEC potentially missing production targets. And when you look at even the demand side, it continues to remain robust if not improve.”