To The Moon

• Even before oil prices crashed on Tuesday morning, hedge funds had started to dump oil as an increasing number of experts highlighted the risk of a recession.
• While demand destruction has given bears the upper hand in oil markets, the upside risks are plentiful and volatility is likely to remain.

Oil traders are selling oil again as concern about the course of the global economy deepens, taking the upper hand over supply fears.

Brent crude has lost more than $20 per barrel over the past month, with West Texas Intermediate down by nearly $25 per barrel at the time of writing. Recession fears appear to be the biggest driver of the price decline, with demand still robust despite prices.

Meanwhile, hedge funds are selling their oil, Reuters' John Kemp reported in his weekly column on oil market moves. In the week to July 5, they sold the equivalent of 110 million barrels of crude oil and fuels across the six most traded contracts.

This has brought the total volume sold across these contracts to a little over 200 million barrels over the past four weeks, Kemp noted. The acceleration in selling over the week to July 5 becomes even more notable in the context of the four-week total.

Forecasts of a recession, specifically in the United States, are multiplying. The latest this week came from TD Securities, which said that the odds of the U.S. falling into a recession by the start of 2023 are over 50 percent.

The firm's head of global strategy, Richard Kelly, listed three factors that would determine the course of the U.S. economy downward: gasoline prices, the Fed's hawking policy as it seeks to tame inflation, and a generally slowing economic growth.

Bloomberg columnist Jared Dillian, meanwhile, suggested in a recent opinion piece that Americans' views of the economy appeared to be downbeat despite one of the strongest job markets ever. He argued that consumers might be talking themselves into a recession, citing economic theory research showing how expectations of higher inflation led to higher inflation.

These forecasts clearly have a strong impact on hedge funds and other money managers, judging by the rate at which these are dumping their bullish positions on oil, even though the fundamentals have not changed in a favorable way over the past couple of weeks.

On the contrary, supply appears to be getting even tighter. Libya last week declared yet another force majeure on oil exports. The actual spare oil production capacity of Saudi Arabia has become the talk of the town, but not in a good way: many are openly doubting the Kingdom's ability to boost production in a meaningful way, that is, a way that would lead to lower global prices.

Russia continues to redirect its European oil exports to other buyers while the West mulls how to implement a price cap designed to keep Russian oil flowing into international markets while reducing the country's revenues from the commodity.

"The oil market is being pulled in two directions with exceedingly tight physical fundamentals set against forward-looking demand concerns and signs of price-induced demand destruction," EBW Analytics researchers said this week, as quoted by Reuters.

As of Tuesday, it looks like demand concerns, particular concerns over Covid lockdowns in China, have taken center stage.

On the bearish front, even if President Biden manages to clinch a deal from Riyadh for higher oil production, doubts about whether the higher production is doable are likely to dampen the effect of such a deal.

On the bullish front, there is no sign anywhere of new supply coming online and the latest SPR release will soon run out.