Oil rebounds above $100 after plunging on recession concerns

Oil rebounded above $100 a barrel after plunging more than 8 percent to the lowest close since late April on concern a recession will hurt demand.

West Texas Intermediate was 2 percent higher as signs of a tight supply situation tempered fears of a global slowdown. Goldman Sachs Group Inc. said crude’s slump was overdone given that production was lagging behind demand.

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.”

In China, there are signs of rising consumption as the world’s biggest oil importer emerges from strict virus lockdowns that pummeled demand. Overall consumption of gasoline and diesel last month was at almost 90percent of June 2019 levels, according to people with knowledge of the energy industry.

In Russia, meanwhile, there’s scope for an interruption to exports on top of sanctions imposed by the US and other nations. A Russian court has ordered the Caspian Pipeline Consortium to halt Black Sea oil loadings for 30 days due to violations of a spill-prevention plan. It’s not clear when that period will start.

Oil markets remain steeply backwardated, a bullish pattern in which near-term prices command a premium to longer-dated ones. Brent’s prompt spread - the difference between its two nearest futures contracts -- was more than $4 a barrel in backwardation, up from around $2.50 a barrel a month ago.

Commodities have peaked, although raw material prices should remain elevated in the second half, according to Citigroup Inc. The bank said in a note that if there’s a recession, crude could retreat back below $70 a barrel.

“The market is already pricing in a mild recession, which should see support for Brent crude at around $100 a barrel,” Catherine Birch, an analyst at Australia & New Zealand Banking Group Ltd. said in a note. That support level could drop to $80 in the unlikely event of global demand falling by 5 percent, an occurrence that has only happened in the most severe of recessions, she said.