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July 6, 2022updated 07 Jul 2022 2:55pm

Fall in oil prices brings attention to an expected recession

Analysts report that the fall in commodities prices in Europe could indicate the risk of recession towards the end of the year

By Smruthi Nadig

Oil prices experienced their biggest fall in nearly four months on Tuesday, reflecting concerns that a slowdown in the economy could reduce demand for fuel as a result of widespread sell-off in the commodities market. 

Analysts have warned that rising oil and gas prices, stemming from changes in Russian supply, place Europe at risk of recession. 

Nomura, a Japanese investment bank, has estimated that the European economy will start to collapse in the second half of 2022 and that it is likely the recession will continue until the summer of 2023, with a 1.7% of GDP decline overall. 

The Guardian also reported that Europe’s economy faces threats including falling demand in the US export market, the conflict between Ukraine and Russia, and issues relating to the energy and food crisis. 

Energy prices had already begun to rise in the second half of 2021, as major economies struggled to recover from the Covid-19 pandemic and shortages sent wholesale gas prices skyrocketing. The war in Ukraine has only made things more difficult as the EU, US, and UK are caught between isolating Russia economically and ensuring continuity of supply. Europe still relies significantly on Russia for its energy needs, and in response to the sanctions, Russian President Putin has slowed gas supplies. 

Amrita Sen, an analyst at research institute Energy Aspects , told the Financial Times that “despite the fears of recession, the [oil] demands are still going strong”. She expected a rise in oil prices as long as the supply was limited. 

The surge in fuel prices has led Western countries to rely on international oil producers to expand their supply, despite a variety of commitments to reducing carbon emissions and the use of fossil fuels. 

Oil rose above $100 a barrel in early 2022 amid concerns that recovery from the Covid-19 pandemic surpasses gas producers’ capability to increase supply. 

Although the UK does not import gas directly from Russia, European shortages might worsen the issue of rising gas prices on open markets. This in turn could lead the UK’s cost of living to surge. 

The shares of major energy corporations fell due to a decline in oil prices. Nine of the top 10 S&P 500 index decliners on Tuesday were oil and gas-related stocks.

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