Is this the next major threat to oil demand?

U.S. manufacturing growth slowed in September to its lowest rate since the start of the pandemic recovery, another sign that the U.S. economy is cooling amid aggressive interest rate hikes from from the Fed.

If the trend continues in the coming months, it would mean a recession is coming to the United States, analysts say.

Still, most believe it could be a mild, or at least very short, recession that may not have a significant impact on oil demand.

Major forecasters, such as the International Energy Agency (IEA) and the US EIA, continue to expect oil demand to increase year on year, both in 2022 and 2023.

However, the oil market is focused on recession fears rather than fundamentals, as Saudi Aramco chief executive Amin Nasser said earlier this week. The market is currently ignoring very low global spare capacity and the fact that producers will struggle to source oil once economies recover, Nasser says.

Economies will rebound sooner or later from the current slowdown in growth. Some major European economies, including Germany, are on the verge of recession.

The question is whether economies, including in the United States, will experience a “harder landing” than the Fed is aiming for. According to Reuters market analyst John Kemp, the latest data on U.S. manufacturing activity, coupled with monetary tightening and recession fears “significantly increase the likelihood of a harder landing.”

The U.S. manufacturing sector continued to expand in September, but at the slowest pace since the pandemic recovery began, according to the latest Institute for Supply Management (ISM) survey released on Monday. Related: OPEC+ to cut oil production by 2 million barrels per day

Demand fell, the new orders index contracted and the new export orders index posted a contraction for the second consecutive month, said Timothy Fiore, chairman of the ISM survey committee on manufacturing companies.

The good news is that manufacturing rose for the 28th consecutive month. The bad news is that the expansion was the slowest since May 2020, at the height of the pandemic-induced economic crisis.

Commenting on the most recent U.S. economic data, Jennifer Lee, senior economist at BMO Capital Markets, told Reuters: “It all comes down to higher borrowing costs and weaker demand.”

“The call for a mild recession still stands,” Lee added.

A mild recession may not materially affect oil demand, especially if the gas-to-oil switch in Europe and Asia accelerates this winter amid natural gas shortages.

Yet worrying signs of a global economic slowdown have emerged in recent weeks.

Last month, FedEx released quarterly numbers below its own expectations due to macroeconomic weakness in Asia and service issues in Europe. Amid expectations of a still-volatile operating environment, FedEx withdrew its fiscal year 2023 earnings guidance from June.

Additionally, growth in global maritime trade is slowing, a sign that the global economic slowdown is underway and a recession in major markets may soon materialize, threatening oil demand.

According to shipping data provider Xeneta, the Xeneta Global Shipping Index (XSI®) in September saw its first monthly decline since January 2022, down 1.1%.

“In September, spot rates on many transactions fell by their largest margin yet as lower global demand and easing global congestion gave shippers a decisive edge,” Xeneta said. in a report last week.

Yet oil and commodity trading giants say oil demand is resilient.

Global oil demand remains resilient despite slowing economies and is expected to hold up even if recessions materialize, executives of some of the biggest commodities trading houses told a conference on Tuesday.

Oil consumption has surprised on the upside in recent months, and there has been no significant demand destruction, as expected, economists and leading trader researchers said at the Argus European Crude conference in Geneva. .

“All the different factors suggest, yes, we may be heading for a downturn, but it will be shorter and shallower than people expect,” said Saad Rahim, chief economist for Trafigura.

By Tsvetana Paraskova for Oilprice.com

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