New York-traded West Texas Intermediate, the benchmark for US crude, settled down $8.03, or 6.8%, at $109.56 per barrel. For the week, WTI was down almost 9%, for its first weekly loss since April.
London-traded Brent crude, the global oil benchmark, settled down $6.69, or 5.6%, at $113.12. For the week, Brent tumbled more than 7% for its first weekly drop as well in two months.
WTI surged earlier this week to a three-month peak of $123.18, its highest since the March run-up to almost $130 after the start of the Russia-Ukraine conflict. Brent rallied to $125.16 this week, after a March peak of nearly $140, which itself was the highest in 14 years.
Technical analysts have been warning for weeks that WTI and Brent prices were severely overbought as both crude benchmarks tacked on about $20 each over the past eight weeks. The oil trade appeared to take serious note of the warning on Friday after US factory output fell for a fifth straight month, as firms struggled with supply-chain bottlenecks and high costs, despite industrial production itself rising.
The Federal Reserve’s divisional chief for Minneapolis, Neel Kashkari, meanwhile warned that the central bank might need to get more aggressive with interest rates if US inflation doesn't retreat from four-decade highs.
That was a sign that June’s three-quarter percentage point increase — the largest in 28 years — could be followed up by more major hikes, despite Fed Chair Jerome Powell’s assurance earlier this week that there will be no more super-sized hikes this year and that rate cuts could actually come as early as 2024.
The US economy has already shown a negative growth of 1.4% for the first quarter. If it does not return to the positive by the second quarter, the United States will technically be in a recession, given that it takes just two straight quarters of negative growth to make a recession.
“Recessions are increasingly likely as central banks race to dramatically raise rates before inflation spirals out of control,” Craig Erlam, analyst at online trading platform OANDA, said as the European Central Bank indicated three big rate hikes as well for 2022. “It is better than the alternative though; stagflation.”
While the world, particularly the United States, was not yet in a stagflationary environment, where prices keep rising while the economy continues falling, the term has “been thrown around way too much in recent months, which perhaps highlights the trepidation around it,” Erlam said.
“The risk of one is rising, which is why central banks are becoming increasingly accepting of their actions tipping the economy into recession,” he added.
While the Ukraine conflict and subsequent Western sanctions on major energy exporter Russia has exacerbated the global tightness in crude supply, this year’s rally in oil has also gone beyond the affordability of many poor consuming nations, say analysts.
In the United States, the best gauge of public burden from the rally was the pump price of gasoline, or petrol, that exceeded $5 a gallon for the first time since last week. Many US pumps, especially those in West Coast states like California, were selling at close to $6 a gallon, the American Automobile Association said. Diesel was even higher in California, at beyond $7 a gallon.