Oil prices have tumbled to their lowest level of the year as worries about the health of the economy overshadow concerns about new restrictions imposed on Russian energy.
The sharp drop in oil prices the past two days is mostly good news for consumers, signaling prices at the gas pump should continue their recent plunge.
US oil fell 3.5% to $74.25 a barrel on Tuesday – the lowest settle since December 23, 2021. That leaves oil down by 43% since briefly topping $130 a barrel in March amid fears about Russia’s invasion of Ukraine.
Brent crude, the world benchmark, also lost 4% on Tuesday to around $79.50 a barrel.
The oil selloff comes after the West hit Russia with new restrictions that, so far at least, do not appear to be derailing global energy markets.
The European Union imposed a ban on seaborne oil imports from Russia on Monday, while the West placed a $60 cap on Russian oil. Both moves are designed to hurt Russia’s ability to finance its war in Ukraine, without hurting consumers by causing Moscow to slash oil production.
“Russia oil is still on the market. As of now, it appears Russia is willing to play ball,” said Robert Yawger, vice president of oil futures at Mizuho Securities.
Yawger said there is “no doubt” energy markets are relieved that the price cap was not significantly lower than $60. A lower cap could have persuaded Russia to retaliate by sharply cutting supply.
“They got a pretty good number. We don’t want to kill the golden goose, just throttle it back,” Yawger said.
The tame reaction from energy markets is welcome news for consumers who are finally getting relief at the gas pump.
The national average price for regular gasoline dipped by two cents to $3.38 a gallon on Tuesday, according to AAA. Gas prices have dropped 14 cents in the past week and 42 cents in a month. The national average is almost unchanged from a year ago when they averaged $3.36 a gallon.
Despite the drop in energy prices, OPEC+ is staying with its game plan. The oil cartel on Sunday announced plans to stick to its oil production cuts rather than taking steps to take more supply offline.
Recession fears continue to rattle financial markets, including not just oil markets but the stock market. US stocks fell sharply on Tuesday, the second straight day of significant losses.
Stronger-than-expected reports on employment, factory orders and service sector activity have fueled concerns that the Federal Reserve will have to move more aggressively to snuff out inflation. Some Fed officials have expressed support for raising rates to 5% or beyond next year.
“This potential 5% interest rate environment is really freaking people out,” said Yawger.