WTI rebounds into the green, now trading in mid-$106.00s despite ugly macro backdrop

• Oil prices are currently trading on the front foot, though it’s been a choppy day so far.
• WTI has rallied back into the $106.00s from earlier lows in the $102.00s.
• Traders are weighing geopolitical tensions against a bearish macro backdrop.

Oil prices are currently trading on the front foot, though it’s been a choppy day so far. Front-month WTI futures fell as low as the mid-$102.00s earlier in the day, but have since reversed back to trading modestly in the green in the $106.00s. Risk appetite remains ropey at the start of the US trading session, with US equities probing multi-month lows, international equity bourses also suffering and bond yields falling amid a flight to safety.

Traders continue to cite fears about slowing global growth, still, sky-high inflation (see this week’s Consumer and Producer Price Inflation reports) and central bank tightening, all of which come against the backdrop of the ongoing Russo-Ukraine war and widening lockdowns in China, as weighing on sentiment. This clearly was weighing on oil prices earlier in the day.

Commentary from major oil market players has also been bearish sounding. Both OPEC and the International Energy Agency (IEA) released their monthly oil market reports on Thursday. The former cut its global oil demand growth forecast for this year for a second successive month due to the impact of the Russo-Ukraine war, demand destruction as a result of inflation and lockdowns in China.

The IEA’s message was similar. “Soaring pump prices and slowing economic growth are expected to significantly curb the demand recovery through the remainder of the year and into 2023,” they said. “Extended lockdowns across China ... are driving a significant slowdown in the world’s second-largest oil consumer”. The agency also revised lower their expectations for demand growth this year.

But there has also been plenty of focus on worsening Russia/EU relations as Finland and Sweden head closer to joining NATO and Germany accuses Russia of “weaponising” its energy exports. This is keeping fears about the impact on Russian oil output of Western sanctions on Russia over its invasion of Ukraine in the spotlight. The EU is expected to agree on a plan to end Russian oil imports soon, in what analysts have said would be a crippling blow to Russia’s energy industry.

Meanwhile, a French Diplomatic source was recently quoted by Reuters as being pessimistic that the US and Iran will swiftly resolve their differences and return to the 2015 nuclear deal. A return to the old deal would see US sanctions on Iran lifted and as much as 1.3M barrels per day in Iranian exports return to global markets, commodity strategists have said.

The combination of these latter two themes seems to have been enough to entice dip-buyers to return to WTI markets as it prices closer to $100. But against such a bearish macro backdrop, it remains to be seen whether WTI can continue its recovery and test earlier weekly highs above the $110 per barrel mark.