WTI crude oil prices are shaping up for a disappointing week. Prices are down about 9.5 percent this week so far. On Wednesday, the commodity extended losses, closing at a new low for this year, touching the weakest point since the end of 2021. A loss of 10 percent this week would result in the worst 5-day performance since March.
Looking at the average weekly performance since 2020, we can use a probability density function to see just how often we can expect this kind of price action to occur. On the chart below, this week’s z-score is shaping up to be about -1.3, which represents the number of standard deviations the drop is from the average. In other words, the probability that crude oil weakens by 9.5% or more in a week is about 10%.
It should be noted that past performance is not indicative of future results, but crude oil’s drop has been anything but random. Likely, a combination of more hawkish Federal Reserve policy expectations and rising recession concerns have been weighing on energy prices.
The closely watched spread between 10-year and 2-year Treasury yields continues to invert, which is often seen as a leading recession indicator. Overnight, China announced an easing of Covid-19 restrictions. That could bode well for oil. However, markets were hardly impressed as the outcome seemed to be largely priced in.