Recession fears are hitting the oil market, with crude falling below $80 a barrel on Friday for the first time since January.
The good news is that the liquidation should lower prices at the gas pump, easing the crippling inflation that has hurt consumers. The bad news is that the sharp drop in oil prices is further evidence that investors are increasingly worried about the direction of the economy.
Oil fell 5.7% to $78.73 a barrel on Friday – the lowest intraday level since Jan. 11.
Investors are worried about the Federal Reserve’s campaign to rein in inflation with punitive interest rate hikes designed to slow the US economy.
“They are deliberately sending this economy into recession,” said Robert Yawger, vice president of energy futures at Mizuho Securities.
Markets are betting the Fed’s rate hikes – the latest at the start of the week – will hurt energy demand by forcing people to drive and fly less and businesses to use less energy.
“Fed rate hikes kill demand for everything, especially energy,” Yawger said.
Gasoline prices fell for 98 straight days until Wednesday, when they rose slightly. The national average for regular gasoline hit $3.69 a gallon on Friday, according to AAA. That’s well below the June 14 peak of $5.02 a gallon.
The energy market’s slide is fueled in part by the soaring US dollar, which continues to soar against rival currencies as investors rush to safe havens. This force tends to be negative for oil – which is priced in dollars – as it erodes the purchasing power of foreign buyers.
“It’s the market saying, ‘If we go into a recession, we go into the dollar and sell everything else. Oil is caught in this,” said Michael Tran, commodities and digital intelligence strategist at RBC Capital Markets.
Oil prices have now fallen about 40% since briefly eclipsing $130 a barrel in March, as investors bet the war on Ukraine would derail Russia’s oil exports. Fears over Russia’s oil supply have proven to be overblown as the country continues to send crude overseas.
The Biden administration’s unprecedented release of emergency oil from the national stockpile also helped the oil selloff.
“Without a doubt, it helped. That’s one of the reasons we’re not at $130 anymore,” Yawger said.