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Below view on oil on behalf of Norbert Rücker, Head Economics and Next Generation Research, Julius Baer

Oil prices dropped below USD 75 per barrel and are down more than 10% over the past days. Recession fears seem in the driving seat pushing the market mood into bearish territory. That said, in our view a marked economic slowdown would push oil prices towards, if not below, USD 50. The oil market does sound the recession alarm bell. Sentiment jitters aside, the prevailing trends should persist: Western world oil demand stagnates, Russian flows establish themselves outside of the West’s hemisphere, and oil nations’ supplies likely continue to surpass pledged quotas.

The oil market faces a stiff breeze these days. Prices dropped below USD 75 per barrel and are down more than 10% from week ago levels. Fundamentally, there has been no major event that explains the growing bearishness. Instead, the price moves seem to largely come from shifts in the market mood. Concerns about a more pronounced economic slowdown seem to weigh on sentiment. Recession risks are the key downside wild card in the market. A marked economic slowdown, however, should push oil prices towards, if not below, USD 50 per barrel and flip the futures curve into contango, i.e. upward sloping. Today, the futures curve remains downward sloping and spot prices still trade well above marginal production costs. Put differently, the oil market does not send a signal of pronounced recession risks. Earlier bullish topics, such as oil politics or China’s reopening, recently lost their glitter. The oil nations’ supply cut failed to lastingly prop up oil prices. Impatient speculators could be driving the current downdraft by shifting out of futures long positions. Despite the recent swings in sentiment, oil prices remain roughly aligned with fundamental trends. Stagnant Western world oil demand, growing shale production, maintained flows from Russia, and the likelihood of the oil nations surpassing pledged quotas should result in a well-balanced oil market longer term. We stick to our Neutral view and see oil prices in the 70s rather than the 80s longer term.

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