Oil prices drop as US recession fears spark broader selloff

[August 05, 2024]  By Paul Carsten

London (Reuters) -Oil futures extended losses in a volatile session on Monday, trailing a stock market selloff sparked by fears of a U.S. recession, though declines were buffered by worries that spreading conflict in the Middle East could hit crude supplies.

Share markets tumbled across Asia as U.S. recession fears sent investors rushing from risk assets while wagering that rapid interest rate cuts will be needed to drive economic growth.

Brent crude futures dropped $1.07, or 1.4%, to $75.74 a barrel by 1128 GMT, with prices trading around their lowest since January. U.S. West Texas Intermediate crude was down $1.18, or 1.6%, at $72.34.

U.S. recession concerns stoked by Friday's weak July payrolls report "only add to Chinese demand concerns that have been lingering in the oil market for some time", ING analysts led by Warren Patterson said in a note.

Slumping diesel consumption in China, the world's biggest contributor to oil demand growth, is also weighing on oil.

The decline in oil prices closely trailed falls in European stock markets. Germany's DAX, France's CAC 40, Britain's FTSE and Spain's IBEX 35 all lost more than 2%.

But even with the latest selloff, oil has still underperformed many major stock exchanges in 2024. Since the beginning of the year the Nasdaq 100 has risen 11% and the FTSE 3%, while Brent crude is down 0.3%

Oil has also been pressured by the decision of the OPEC+ group of producers to stick to its plan to phase out voluntary output cuts from October, which means that supplies will rise later this year, analyst say.

A pumpjack operates at the Vermilion Energy site in Trigueres, France, June 14, 2024. REUTERS/Benoit Tessier/File Photo

OPEC oil output rose in July despite production cuts by the group, a Reuters survey showed on Friday.

However, oil losses were capped by geopolitical risks in the Middle East. Fighting in Gaza continued on Sunday, a day after an unsuccessful round of ceasefire talks in Cairo.

Israel and the United States are bracing for a serious escalation in the region after Iran and its allies Hamas and Hezbollah pledged to retaliate against Israel for the killings of Hamas's leader and a top Hezbollah military commander last week.

"The risk of a wider regional war, while I still think is small, can't be ignored," said Sydney-based IG market analyst Tony Sycamore.

Investors are also awaiting U.S. services data for last month to gauge the health of the world's largest economy, Sycamore said.

"Another fall tonight and it supports the idea the Fed is behind the curve," he said, referring to the U.S. central bank's delays to interest rate cuts.

(Reporting by Paul Carsten in London and Florence Tan in SingaporeEditing by David Goodman)

[© 2024 Thomson Reuters. All rights reserved.]
This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.