Crude oil prices extended their downward trajectory as trading commenced on Monday, continuing a steep decline that began on Friday. This marks the third consecutive day of falling prices, driven by mounting fears that the United States may be on the brink of a recession, which is dampening expectations for crude oil demand.
Despite escalating geopolitical tensions in the Middle East that could potentially disrupt supply, the economic outlook remains the dominant factor influencing oil markets. Brent crude futures, which dropped over 3% during Friday’s session, fell an additional 0.5% on Monday, trading near an eight-month low of $77.60 per barrel. Meanwhile, WTI crude futures decreased by 0.8% to $72.96 per barrel, reaching levels not seen since December 2023.
The recent downturn has resulted in a 5% decline in Brent crude prices and a 6% drop in WTI crude prices so far in August.
Economic data from the U.S. last month revealed signs of weakness, with manufacturing activity contracting at its most rapid pace since December 2023 and job growth significantly slowing. The unemployment rate unexpectedly rose to 4.3%, the highest level since October 2021. These developments have heightened concerns about a potential recession, contributing to a sharp sell-off in commodity prices over the past two trading sessions.
Following the release of the July jobs report, critics have targeted the Federal Reserve’s decision to maintain high interest rates for an extended period. Many economists argue that the Fed should have reduced rates last week to support the faltering economy, particularly in light of the weakening labor market data.
On July 31, the Federal Reserve held interest rates steady at a 23-year high of 5.25%–5.50% for the eighth consecutive meeting. The Fed has maintained these rates for over a year, although Chairman Jerome Powell has hinted at a potential rate cut as early as September.
Economists caution that even if the Fed cuts rates in September, the impact may be delayed. High borrowing costs have already made financing for homes, cars, and credit cards more expensive. Additionally, it could take several months to a year for the effects of a rate cut to be fully felt in the economy.
Goldman Sachs has raised the likelihood of a U.S. recession within the next year to 25% from a previous estimate of 15%, according to Bloomberg. Despite the increase in unemployment, the firm suggests there are several reasons to remain cautiously optimistic.
Further complicating the oil market, China’s manufacturing sector unexpectedly contracted for the first time since October, exacerbating concerns about oil demand.
Meanwhile, tensions in the Middle East have intensified following an Israeli airstrike on Sunday that targeted two schools, resulting in at least 30 fatalities. Regional unrest escalated after the assassination of Ismail Haniyeh, the leader of the Palestinian Islamist group Hamas, in Tehran on Wednesday, and an Israeli strike in Beirut that killed Fuad Shukr, a senior Hezbollah military commander.
Both Hamas and Hezbollah receive support from Iran. In response, the United States is deploying additional military forces to the region to help de-escalate the situation, as reported by Reuters.
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