Oil prices near 8-month low as recession fears overtake Middle East conflict, Brent down 5% in Aug

Crude oil prices continued their downward trend as Monday's session opened, extending sharp losses from Friday. This marks the third consecutive day of decline, driven by investor concerns that the United States may be heading toward a recession, which has negatively affected the outlook for crude demand.

The growing recession was offset by supply risks arising from geopolitical strains in the Middle East. After falling over 3% during Friday's trading, Brent crude futures dropped another 0.5% today, to trade near an 8-month low of $77.6 per barrel. Similarly, WTI crude futures fell by 0.8% to $72.96 per barrel, a level not seen since December 2023. 

This recent decline has resulted in Brent losing 5% and WTI losing 6% so far in August.

The U.S. economy showed signs of weakness last month, as manufacturing activity contracted at its fastest rate since December 2023 and job growth slowed significantly. Alarmingly, the unemployment rate unexpectedly rose to 4.3%, the highest level since October 2021.

These fresh data have ignited worries that the economy could be falling into a recession, which led to a to a sharp sell-off in commodity prices over the last two trading sessions.

Following the July jobs report, many economists have criticized the Federal Reserve for maintaining high interest rates for an extended period. They argue that the Fed should have lowered rates last week to support the economy, as labour market data shows signs of weakening.

On July 31, the Fed kept interest rates unchanged at a 23-year high of 5.25%–5.50% for the eighth consecutive meeting in July 2024, in line with expectations. The Fed has been at these rates for over a year now. However, Jerome Powell indicated that a rate cut could occur as soon as September.

Economists have pointed out that even if the Fed cuts rates in September, the current high rates have already made borrowing more expensive for purchasing homes, cars, or using credit cards. Additionally, it could take several months to a year for the effects of a rate cut to be fully realized in the economy.

Economists from the Goldman Sachs Group have increased the probability of a recession in the United States in the next year to 25 percent from 15 percent, Bloomberg reported. They, however, also noted that there are “several reasons not to fear a slump," despite a jump in unemployment.

Additionally, China's manufacturing sector unexpectedly contracted for the first time since last October, heightening concerns about oil demand.

Simultaneously, tensions in the Middle East have escalated. An Israeli airstrike on Sunday targeted two schools, resulting in at least 30 fatalities. Regional unrest intensified following the assassination of Ismail Haniyeh, the leader of the Palestinian Islamist group Hamas, in Tehran on Wednesday, a day after an Israeli strike in Beirut killed Fuad Shukr, a senior military commander from Hezbollah.

Both groups are supported by Iran. In response, the United States is deploying additional military forces to the Middle East as a defensive measure aimed at de-escalating regional tensions, Reuters reported, citing the sources.

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