Oil prices feel the weight of a recession — falling to pre-Russian invasion levels

Oil markets are feeling the weight of a recession. WTI crude oil prices fell below $90 for the first time since the Russian invasion began — falling 24% over the past two months.

Here’s a warning for anyone still holding oil investments: it could get worse, real quick.

Oil prices go full circle

On the consumer side, U.S. gas prices fell for seven straight weeks — with the national average falling closer to $4 a gallon. What’s causing the drop in oil and gas prices?

• 64% of adults changed their driving habits as a result of higher gas prices — 80% of which are driving less (AAA survey).
• Americans are even driving less than they did during the COVID summer of 2020.

The decline is reflected in this week’s U.S. oil inventory data — which showed U.S. crude and gasoline supplies unexpectedly rising.

Tensions in Taiwan, slowing global growth and falling Chinese manufacturing activity are also helping slow demand.

The moment investors have been waiting for

In July, Biden traveled to Saudi Arabia to ask OPEC+ to pump more oil. So what did OPEC+ do in response? They raised oil output targets by 100,000 barrels a day. Sounds like a lot?

Here’s what energy expert Raad Alkadiri has to say: “That is so little as to be meaningless… As a political gesture, it is almost insulting.”

Now back to investing. Lower oil prices have major implications for investors and businesses:

• Easing inflation: High oil prices contributed to high inflation and higher business costs. Falling oil prices would reverse these factors.
• Interest rates: Lower oil prices would give the Fed reason to slow down the pace of interest rate hikes — much welcomed news for investors.

Investors: Don’t overstay your welcome

Even with the drop, the S&P 500 Energy Sector is still the top-performing sector (+34%) by a landslide. The second is Utilities — up 4%.

In 2007, Energy was the top-performing sector — up 34.4%. Then the recession hit, and oil prices collapsed 70% in seven months. The energy sector finished 2008 down 34.9%.

Unless we see a jump in demand or a supply-impacting event (i.e., a hurricane), oil prices could continue to fall alongside the economy.