WTI prices sag to mid-$83.00s in tandem with US equity market downside after Monday’s wild swings

• After chopping within an $82.00-$86.00 range on Monday, WTI futures are a little lower on Tuesday in the mid-$83.00s.
• But WTI’s on-the-year outperformance compared to equities remains remarkable and will likely persist amid bullish crude oil specific factors.

It was a choppy start to the week for global oil markets, with front-month WTI futures swinging within an $82.00-$86.00 range as energy markets were buffeted by extreme volatility in US equity markets. With US equity futures pointing lower heading into the Tuesday, oil prices are also sagging, with WTI down just under 50 cents and trading in the mid-$83.00s, now a good $4.0 below the multi-year highs printed last Wednesday above $87.50. While recent volatility/downside in US equity markets, which analysts have said is being driven by heightened Fed tightening fears ahead of Wednesday's policy announcement, has weighed on oil in recent days, oil continues to outperform on an on-the-year basis.

WTI is up 11% on the year having surged from the mid-$75.00s, S&P 500 futures are (ahead of the open) trading down nearly 9.0% on the year. Crude oil-specific factors have been supporting oil prices. Firstly, expectations for a continued robust recovery in crude oil demand this year remain elevated, with the international spread of Omicron already easing and not seen as dealing a long-term blow to demand. Secondly, OPEC+ supply issues have been a big theme, with smaller producers in the cartel struggling to keep pace with rising output quotas.

Geopolitical tensions have also been amping up increasing the risk-premia embedded in oil prices; Iran-aligned Yemeni militia groups have recently upped attacks on the UAE, near the key Strait of Hormuz global oil supply chokepoint. Meanwhile, NATO has started beefing up its Eastern European military presence in response to the Russian military build-up on the Ukrainian border. The implication for Russia’s oil output/exports (Russia is the world’s third-largest oil producer of more than 11M barrels per day) in case of a military incursion remains unclear. These factors are likely to keep oil prices underpinned relatively well versus equity markets, even if the downturn in the latter continues.