Oil Prices Significantly Drop Last Week Due to Recession Risks

The price of a barrel on the London market fell by 6.4 percent last week, to $91.63, while on the American market, the barrel decreased by 7.6 percent, to $85.60.

After rising more than 10 percent a week earlier, oil prices significantly dropped last week as traders were concerned about forecasts of a possible global recession that would mean weaker demand for oil.

The International Monetary Fund (IMF) warned last week in its autumn forecasts that one-third of the global economy is likely to experience a decline this year or next due to falling real income and rising prices.

The IMF estimates that the global economy will grow by 3.2 percent this year, while growth could slow to 2.7 percent next year.

In the US, China, and the eurozone, activities are expected to nearly stagnate, according to the IMF.

Due to the potential recession, the International Energy Agency (IEA) has lowered its forecasts for oil demand growth this year and next, building on the reduced estimates from the Organization of the Petroleum Exporting Countries (OPEC).

– Prices have been pressured by significantly lowered demand forecasts (for oil), primarily for next year – say analysts at Commerzbank.

About ten days ago, OPEC and its allies prompted a rise in oil prices with a decision to cut production by two million barrels per day starting in November.

The IEA explains that some members have failed to meet their quotas in the past period, meaning that OPEC+ will actually reduce production by one million barrels per day.

Traders are also monitoring the situation in China, which is trying to curb a new wave of Covid-19 infections with strict measures. The number of infections is small by global standards, but China is implementing a zero-tolerance policy towards the coronavirus, which is hindering economic activities and thus demand for oil.

And the growth of the US, the largest economy in the world, will also slow down. Because inflation in the US continues to hover around the highest levels in 40 years, it is estimated that the US Federal Reserve will again raise key interest rates by an aggressive 0.75 percentage points at its two-day meeting on November 1 and 2, marking the fourth consecutive increase.

After oil prices surged more than 50 percent last year, thanks to the recovery of economies from the coronavirus crisis, they have risen nearly 20 percent since the beginning of this year, primarily due to the war in Ukraine.