Crude Oil Hits New Low Since January; Here's Why Hedge Funds Think It Won't Last

Oil prices were low due to recession concerns and a stronger U.S. dollar.

Fears that a projected economic slowdown could affect worldwide demand in the energy markets led to further steep drops in oil prices on Friday, marking the fourth straight week of decreases.

Amid rising recessionary concerns, U.S. benchmark West Texas Intermediate prices fell by about 5% to trade at $79 per barrel, its lowest level since January. In addition, Brent crude, used as a global benchmark, has dropped below $87 a barrel and is headed for its lowest closing since January.

Crude oil prices for WTI and Brent were technically oversold on Friday after falling for a fourth consecutive week. Both oils have been dropping since December.

Both the S&P 500 and the Dow Jones Industrial Average dropped back into bear market territory on Friday as investors panicked over the prospect of a global economic downturn, which has been pushing on energy prices. As a result of the widespread selling, both of the major indices hit fresh yearly lows.

The ongoing strength of the U.S. dollar, widely seen as a haven asset, also contributed to the price of oil falling. The Dollar's value relative to a basket of other currencies as measured by the ICE U.S. Dollar Index increased by about 1 percent to a new high not seen since 2002.

Following the Federal Reserve's announcement on Wednesday that it would increase interest rates by 75 basis points for the third straight policy meeting, central banks around the world announced similar rate increases. According to Oanda senior market analyst Edward Moya, worries over global economic growth have "reached panic mode given a chorus of central bank vows to battle inflation."

He notes how "the dollar advance is about to approach another level that might keep the pressure on commodities" because "central banks are poised to continue aggressive with rate hikes," which "would impair both economic activity and the short-term crude demand picture."

More than 6% of the S&P 500 energy sector's value was wiped out on Friday, making it the sector's worst single-day performance since May and compounding its previous losses. However, the industry has done far better than the S&P 500 this year (down 23%), increasing by more than 20% due to the rise in oil prices early in the year.

However, since oil prices have returned to earth, some investors may consider taking their money and running. According to Adam Crisafulli, founder of Vital Knowledge, "not only are their worries about consumption given mounting recession risks, but this is pretty crowded area with a lot of fearful longs sitting on solid year-to-date profits that they are keen to lock in."

Many analysts, though, continue to hold out some hope that oil prices will rise again in the long run. They warn that global supplies could be further restricted if restrictions on Russian energy are tightened in light of the ongoing conflict in Ukraine. Therefore, several of the largest banks on Wall Street forecast a price increase for the fourth quarter of this year, particularly if demand remains strong and stockpiles remain low.

Moya claims that "economic activity is not dropping off a cliff" despite the "bearishness that is impacting oil prices." When asked about the future price of WTI crude, he speculated that it might drop below $74 per barrel if selling pressure remained strong into the following week.

As the European Union prepares to execute its sanctions on Russian oil in the coming months, "oil prices are going to come under fresh upward pressure," says Mark Zandi, chief economist of Moody's Analytics. Even while part of the EU's oil imports from Russia will be redirected to other nations, "covering the hole in oil supply could prove tough, at least fast enough to avoid a crippling surge in costs," he says.