Oil dives more than $4 on strong dollar, recession fears
The selloff in oil accelerated into a near freefall on Wednesday, with global benchmark Brent crude breaking key support of $90 per barrel the first time since February.
Twenty-year highs in the dollar that raised the acquisition cost for crude when bought on other currencies; China’s growing COVID lockdowns and fears of a third straight 75-basis point rate hike by the U.S. Federal Reserve when it meets on September 21 led to a perfect storm for oil bulls.
Add to that the G-7 efforts to cap the selling price of oil by Russia, to deny Moscow the maximum revenue it seeks for its energy exports in order to finance its war against Ukraine.
“The Russian oil price cap is particularly a tricky one. There are fears that an angry Putin will halt all oil and gas supplies to teach the West and the world a lesson for trying to gang up against Mother Russia,” said John Kilduff, partner at New York energy hedge fund Again Capital.
“On the other hand, Russia also needs to keep the revenue stream going, so it probably needs to export its hydrocarbons at some point. That’s probably what’s weighing on the market too, since the sub-$90 per barrel of Brent in the actual market may be closer to between $55 and $60 based on what Russia is forced to sell at.”
Brent, the London-traded global benchmark for oil, was down $3.20, or 3.5%, to $89.63 per barrel by 9:57 ET (13:57 GMT).
New York-traded West Texas Intermediate, the benchmark for U.S. crude, was down $3.28, or 3.8%, to $83.60.
“While the Fed’s definitely going to keep hiking its interest rates, I think there’s zero question about that. The only question is how much and how fast.”
A survey from the Institute for Supply Management (ISM) showed the U.S. services industry picked up in August for the second straight month amid stronger order growth and employment, while supply bottlenecks and price pressures eased.
However, numbers from S&P Global showed services sector PMI fell short of flash estimates for August.
Traders see about 75% chance of a third 75-basis-point rate hike at the Fed’s policy meeting later this month. FEDWATCH
Focus will be on Fed Chair Jerome Powell’s speech on Thursday as well the U.S. consumer prices data next week for clues on the path of monetary policy.
Markets started September on a weak note as hawkish comments from Fed policymakers and data signaling momentum in the U.S. economy raised fears of aggressive interest rate hikes.
The benchmark S&P 500 .SPX closed at a six-week low on Friday as worries about the European gas crisis overshadowed relief from the monthly jobs data, which pointed to a slight easing of wage pressures. The index is down nearly 18% so far this year, while the Nasdaq has shed nearly 26% as rising interest rates hurt megacap technology and growth stocks.
Among the major S&P sectors, consumer discretionary .SPLRCD and communication services .SPLRCL fell the most, while defensive utilities .SPLRCU and real estate .SPLRCR rose.
At 12:17 p.m. ET, the Dow Jones Industrial Average .DJI was down 104.63 points, or 0.33%, at 31,213.81, the S&P 500 .SPX was down 9.49 points, or 0.24%, at 3,914.77, and the Nasdaq Composite .IXIC was down 49.39 points, or 0.42%, at 11,581.47.