Crude oil prices witnessed a severe crash yesterday, recording its most significant daily drop in a day since March 2021. The natural price fell from its opening price at $109.44 to a low of $95.73, marking a significant 1371.4 pips decline in a single day. The decay seen in oil prices has been engineered by escalating fears of a global recession amidst rising inflation levels coupled with a solid dollar performance seen yesterday in the market. Thus, the dollar index rose to a twenty-two-year high of 106.78. This caused a severe crash yesterday in the market price of all assets and commodities pegged to the US dollar. Crude price was therefore stifled by a strong dollar amidst the massive selloffs over the fears of an imminent recession.
Major causes of the crash in crude oil prices
- Diminishing demand: With the increasing fears of a global recession and glowing hardships across the countries, governments, individuals, and companies alike were forced to cut down their daily budgets on oil purchases. This reduced the oil demand, allowing for a massive decline in oil prices. Also, according to the reports from CME Group on oil futures, it was discovered that investors cut down on their open positions for oil purchase by 2.7K contracts. Hence the volume of investments for oil fell by 188K leading to a massive fall in oil prices.
- Increased supply: The news of the termination of the Norwegian oil and gas workers’ strike signalled a return to an increased oil supply amidst the loss of appetite for buying. Also, the last three consecutive months recorded increased oil production from Venezuela and Iran.
- Global recession fears: The market is concerned about the escalating inflation rates, which remain unabated by the series of aggressive interest rate hikes. This has caused oil buyers to cut down on their expenses. Oil buyers lost their appetite for buying. Investors have diverted to save their income from withstanding the projected global recession. Many companies have equally sought alternative sources of energy to save costs. Based on the projected imminent recession, Citibank expects oil prices to drop to at least $65 per barrel.
- The rapid increase in dollar strength: The massive pump in the dollar index experienced yesterday has primarily contributed to the crash in oil prices. Thus, the dollar index rose to twenty-two years high yesterday at 106.7. This has pushed down the price of crude oil and every other commodity pegged to the US dollar.
- Fear of a possible Chinese lockdown: The Chinese government’s recent declaration of a mass COVID-19 test for citizens caused panic that a return to the previous COVID-19 lockdown might follow soon. Perplexed by the current situation, Oil buyers were forced to slow down their purchases until economic activities in Asia were thoroughly restored.
- Crisis in oil refineries: An essential factor for the massive sell-off of crude oil yesterday could be attributed to the pessimistic reports from the Secretary-General of the Petroleum Exporting Countries (OPEC) – Mohammad Barkindo. He reported that the oil sector is currently facing enormous challenges on all fronts. He observed that the “Refining capacity in OECD countries declined by 3.3% globally in 2021.” This has further pushed buyers to divert from oil investment into other reliable and less risky assets.
In light of these factors highlighted above, it is evident that the overall sentiment towards oil is bearish. We may experience some retracement in oil prices above $100 momentarily. This is driven by the relative strength index, and other indicators point to oil as being in an oversold zone.
