How did recession fears and a strong US dollar cause oil prices to drop 1.5% last week?

Brent crude prices gained 13 cents to end the day at $96.72 per barrel. WTI crude in the United States gained 27 cents to close at $90.77 per barrel. Over the course of the week, both indices lost around 1.5%.

On Friday, oil prices leveled down, but they ended the week lower due to a stronger U.S. dollar and worries that an economic slowdown would dampen crude demand.

With a 13-cent increase, Brent crude futures closed at $96.72 a barrel. WTI crude in the United States gained 27 cents to close at $90.77 per barrel. Each index lost around 1.5% during the course of the week.

When Richmond Federal Reserve President Thomas Barkin nL1N2ZV147 noted the drive to raise rates also needs to be balanced with the impact rate hikes are having on the economy, oil prices spiked temporarily in choppy trade. However, crude retraced some of its gains as resurgent market anxiety over rate hikes dampened sentiment.

Rising U.S. dollar values have made oil more expensive for customers using currencies other than the dollar, which has helped to limit crude advances. [USD/]

Jim Ritterbusch, of oil trading consulting firm Ritterbusch and Associates, wrote in a note that "while the oil complex has been able to shrug off a strong dollar on any one session, protracted strong dollar trends would provide a substantial hurdle against sustainable oil price advances."

The $5 per barrel difference between prompt and second-month Brent futures has shrunk to approximately $1 since the end of July, suggesting that oil supply constraints are relaxing. Currently, the premium for WTI is only 39 cents, down from roughly $2 in late July.

To Reuters, OPEC's new secretary general, Haitham Al Ghais, expressed confidence in the market for oil through 2023.

Al Ghais, speaking before OPEC's meeting on September 5, emphasized the organization's interest in keeping Russia in the OPEC+ group.

European purchasers seeking alternatives to Russian oil before EU sanctions take effect on December 5 might cause a shortage.

Consulting firm FGE estimated that "the EU will need to replace seaborne Russian oil imports with crude from other locations," amounting to 1.2 million barrels per day.

This week's data indicated a significant decrease in U.S. crude stockpiles as the biggest oil producer in the world sent out a record 5 million barrels per day last week. It was in response to rising demand from European countries eager to replace Russian petroleum. [EIA/S]

As energy companies gradually return production to pre-pandemic levels. 

Meanwhile, according to data published by the United States Commodity Futures Trading Commission (CFTC) on August 16, money managers reduced their net long U.S. crude futures and options positions in New York and London by 18,389 contracts to 154,824.

(New York-based reporter Laila Kearney

Marguerita Choy and Matthew Lewis (with contributions from Shadia Nasralla in London, Florence Tan in Singapore, and Yuka Obayashi in Tokyo)