Oil Prices Pulled Lower by Dimming Demand

Source: By Matt Grossman, Wall Street Journal • Posted: Tuesday, July 5, 2022

West Texas Intermediate crude closes below $100 a barrel for first time since May

Oil prices shot higher earlier this year as war in Ukraine disrupted supply lines and the world-wide postpandemic reopening lifted demand. That move has contributed to the persistent inflation that has gripped major economies world-wide in 2022. The growth outlook is darkening as central banks work to get inflation under control by cooling economic activity, pulling down traders’ forecasts for oil demand.

Contracts for Brent crude, the international benchmark, dropped $10.73, or 9.5%, to $102.77 Tuesday. West Texas Intermediate, the U.S. standard, finished down $8.93, or 8.2%, to $99.50 a barrel, its first close below $100 since early May and its largest one-day percentage decline since April.

Just under a month ago, Brent futures were trading above $120 a barrel, with global supply pressured by fallout from Russia’s invasion of Ukraine.

The war shows no signs of winding down, but traders’ attention is shifting to the possibility that a downturn in economic growth could cool demand for fuel. Consumer spending and industrial orders showed signs of slowing in data released last week, underscoring investors’ building concerns about the possibility of a recession.

Average gasoline prices across the U.S. have retreated to $4.80 a gallon, off records above $5 a gallon that drivers saw last month, according to AAA. Gasoline is still more than 50% higher than a year ago, however, leading drivers to cut back.

More broadly, some crude-oil traders are feeling the weight of negative sentiment that is touching a range of commoditiesas the economic outlook dims, said Jim Ritterbusch, president of oil-advisory firm Ritterbusch & Associates. S&P’s broad index of commodity prices was down 6.4% on Tuesday.

“The acceleration of recession expectations in the second half of the year has weighed on a slew of commodities, and oil has gotten swept up in that to a large extent,” Mr. Ritterbusch said.

Declining prices are forcing some traders to unwind bullish bets on crude, he added, exacerbating the selloff.

Some energy traders have zeroed in on indications that gasoline demand is already tempering. On a four-week-average basis, demand was down about 2% year-over-year through June 24, according to the federal Energy Information Administration.

The pain also touched energy-sector stocks, which lost about 4% on Tuesday, the steepest decline of any of the S&P 500’s 11 sectors. The broad-market index was up 0.2%.

Besides recession fears, the strengthening dollar and the typical summer decline in agricultural markets have speculators backing away from commodities, which were a popular bet this year with fund managers looking to protect the rest of their portfolios from rising prices.

“Hedge funds are taking chips off the table,” said Dave Whitcomb of Peak Trading Research.

Analysts warned that declining crude-oil prices may not bring drivers and other fuel consumers as much relief as would be expected normally. That is because limits to global refining capacity have pushed the ratio of retail fuel prices to crude-oil prices far above typical levels.

There are few fast solutions because new refineries take years to bring online, and environmentalist concerns about fossil fuels have discouraged new investment, Goldman Sachs analysts wrote in a note published over the weekend.

—Ryan Dezember contributed to this article.

Write to Matt Grossman at matt.grossman@wsj.com