Oil Prices in Tailspin as Economic Risks Darken Demand Outlook, Bears in Control

• Oil prices plummet, extending losses from the previous session and falling to their lowest level since late March
• Growing economic risks weigh on demand prospects for growth-sensitive commodities
• Oil’s technical outlook worsens following the invalidation of two key support levels

Crude oil prices plunged on Wednesday, extending losses from the previous session and sinking to their lowest level since March 24, undermined by growing macroeconomic headwinds, including the possibility of a U.S. recession in the medium term. In early afternoon trading in New York, WTI futures were down about 5% to trade at $68.05 per barrel, accumulating a drop of more than 11% since the beginning of the month, a clear sign that bears are back in control of the steering wheel.

Although the U.S. outlook remains in a state of flux, many traders believe that the North American economy is headed for a painful downturn later this year, buckling under the weight of rising borrowing costs, with the Federal Reserve’s funds rates at their highest point since 2007. It is impossible to predict the future with any accuracy, but a recessionary environment should sharply reduce fuel demand, at least in theory, increasing downside risks for growth-sensitive energy commodities considering that the U.S. is the largest consumer of petroleum in the world.

CRUDE OIL FUTURES TECHNICAL CHART

The ongoing U.S. banking sector tumult, which first erupted in March, is throwing another curveball into the outlook. Investors fear that the fallout from the crisis will tighten credit conditions materially in the coming months, further weighing on economic activity. This could reinforce oil’s downward trajectory, especially given that demand from China and the recent OPEC+ decision to cut production have had no lasting positive impact on energy markets.

In terms of technical analysis, oil prices have breached two important support levels over the past 24 hours: the first one situated near $71.50 and the second one roughly at $70.00. These bearish breakdowns, which have fortified the pace of the selloff, may set the stage for a retest of the $66.25 region soon. On further weakness, the focus would shift to the 2023 lows.

In the event of a bullish reversal, initial resistance appears at the psychological $70.00 mark. Successfully piloting above this barrier could attract new buyers to the market, creating the right conditions for a rebound to $71.75.