Crude oil futures extend steep declines as risk-off sentiment hits markets

Crude oil futures were sharply lower in mid-morning Asian trade May 10, extending steep overnight declines, as recession fears, hurdles to an European Union-ban on Russian oil and the ongoing spread of COVID-19 in China saw sell-offs across the financial markets.

At 10:22 am Singapore time (0222 GMT), the ICE July Brent futures contract was down $1.30/b (1.23%) from the previous close at $104.64/b, while the NYMEX June light sweet crude contract fell $1.24/b (1.2%) at $101.85/b.

Both markers had plummeted by close to $7/b overnight, their biggest one-day fall since late-March, as a confluence of bearish factors sent financial markets tumbling across the board. The downbeat mood continued in the May 10 Asian morning session, analysts said.

"The worm turned for oil bulls positioned for EU sanctions only to get sideswiped by headlines, suggesting Shanghai is tightening mobility restrictions and no EU embargo agreement," said SPI Asset Management Managing Partner Stephen Innes in a May 10 note.

"However, the swift repricing of global recession risks on the back of central banks hiking rates into a perfect storm is triggering investors' sell-all reaction mode."

The possibility of a quick resolution to an EU draft to ban Russian oil remained remote as member-state Hungary continued to oppose the plan. European Commission President Ursula von der Leyen had travelled to Hungary May 9 to persuade Prime Minister Viktor Orban to support the ban.

Meanwhile, China continues to fight the COVID-19 spread within its borders. Shanghai tightened its COVID-19 restrictions despite falling infections in the city, with notices issued in several districts over the weekend ordering residents to stay home, according to media reports.

Global recession risk looms

The recent oil price decline is a continuation of what has been several months of heightened volatility for oil prices, and for the broader financial markets as a whole. As central banks across the globe start to pare down easy monetary policies that have sustained their economies through the pandemic, investors have grown increasingly concerned about the risks of a global recession.

"Markets continue to price in the impending deterioration of economic conditions, brought about by the Fed's tightening of liquidity, lingering geopolitical tensions and China's virus risks," said IG market strategist Yeap Jun Rong.

Nonetheless, the OPEC+ group continues to struggle to raise output to pledged levels, likely limiting the scale of any fall in oil prices.

Crude oil production by OPEC and its partners fell to a six-month low of 41.58 million b/d in April as Russian production took a battering from Western sanctions, the latest Platts survey by S&P Global Commodity Insights found May 9.

The gap between OPEC+ production and quotas rose to a record-high 2.59 million b/d as 13 out of the 19 countries with quotas struggled to hit their output targets, the survey found.

The shortfall propelled the group's quota compliance to 220.3% -- illustrating how the sanctions on Russia, along with capacity constraints faced by several members, have eroded the alliance's ability to balance the market even as it keeps raising its production targets every month.

Dubai crude swaps and intermonth spreads were mostly lower in mid-morning trade in Asia May 10 from the previous close.

The July Dubai swap was pegged at $95.77/b at 10 am Singapore time (0200 GMT), down $7.37/b (7.15%) from the May 9 Asian market close.

The June-July Dubai swap intermonth spread was pegged at $2.39/b at 10 am, unchanged from the previous close, and the July-August intermonth spread was pegged at $1.44/b, down 45 cents/b.

The July Brent/Dubai EFS was pegged at $8.22/b, down 44 cents/b.