Oil prices slip, Barclays warns of up to $20 dip due to economic slowdown

As Barclays cautioned about $15 to $25 per barrel downside risk, oil prices fell on Wednesday, erasing the previous session’s gains, after industry data showed an unexpected build in crude and fuel inventories in the United States.

The US is the world’s biggest oil user and enough supply coupled with stocks in the country means less fuel demand, thus reigniting the worries about the prospects.

Barclays’ warning comes against its current forecast of $98 per barrel, as it in a recent note linked downside risk to a possible continued slowdown in global manufacturing activity.

“Given the challenging macroeconomic backdrop (we) highlight $15-25/barrel of downside to our forecast if the slump in global manufacturing activity worsens similar to the 2008-09 episode,” Barclays said, adding that it “would imply 1-2 million barrels per day downside to our demand estimates.”

The forecast comes as the World Bank on Tuesday warned about slowdown in global growth rate and warned of another global recession in the latest Global Economic Prospects report.

Global growth is expected to slow “perilously close” to recession in 2023, the World Bank said, slashing its economic forecast on high inflation, rising interest rates and Russia’s invasion of Ukraine.

The World Bank’s latest forecast for the world points to a “sharp, long-lasting slowdown” with growth pegged at 1.7 percent, roughly half of the pace it predicted in June. This is among the weakest rates seen in nearly three decades, overshadowed only by the pandemic-induced recession of 2020 and global financial crisis in 2009.

On Wednesday, US West Texas Intermediate (WTI) crude futures fell 59 cents, or 0.8 percent, to $74.53 a barrel at 0134 GMT, while Brent crude futures were down 62 cents, or 0.8 percent, at $79.48 a barrel.

US crude stocks jumped by 14.9 million barrels in the week ended Jan 6, sources said, citing data from the American Petroleum Institute (API). At the same time, distillate stocks, which include heating oil and jet fuel, rose by about 1.1m barrels.

Analysts had expected crude stocks to fall by 2.2 million barrels and distillate stocks to drop by 500,000 barrels.

Traders will be looking out for inventory data from the US Energy Information Administration due later on Wednesday to see if it matches the preliminary view from API.

The oil market has been pulled lower by worries about US interest rate hikes to curb inflation which would trigger a recession and curtail fuel demand, offsetting hopes for fuel demand growth in China, the world’s second-largest oil consumer, as it eases Covid-19 curbs and resumes international travel.

“Monday’s news that China had issued a fresh batch of import quotas suggests the world’s large importer is ramping up to meet higher demand,” ANZ Research analysts said in a note.

The big focus this week is on US inflation data, due on Thursday. If inflation comes in below expectations that would drive the dollar down, analysts said. A weaker dollar can boost oil demand as it makes the commodity cheaper for buyers holding other currencies.

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