COM - Oil prices 'almost need a small recession' to balance the market - Saxo Bank

Saxo Bank analyst Ole Hansen said Wednesday that supply remains constrained in the oil market, meaning that a fall in demand is necessary to hold crude prices at these levels.

"You can almost argue now that we almost need a small recession in order to balance the oil market, thereby just keeping the prices at current levels," the head of commodity strategy at Saxo Bank told CNBC.

Hansen pointed to "so very tight conditions" in the oil market for his view. The analyst predicted that a deep recession would significantly undercut oil prices, but a shallower downturn would likely only balance out the limited supply situation.

Looking at near-term trading, Hansen referred to summer action as "the silly season," with liquidity historically much lower during the middle months of the year, as many participants take vacations. This could lead to broader swings in prices.

As to the recent price action, WTI crude ( CL1:COM ) dropped sharply on Tuesday, with oil falling below $100 a barrel -- its first close at the sub-$100 level in more than a month . Crude continued its retreat in Wednesday's early action, falling to just above $97 a barrel.

With the retreat, the Energy Select Sector SPDR ETF ( XLE ) declined nearly 4% on Tuesday and added to the weakness with an almost 3% slide in Wednesday's early action.

The sector downdraft has weighed on some of the biggest players in the industry. Exxon Mobil ( NYSE: XOM ), ConocoPhillips ( COP ), Chevron ( CVX ) and Halliburton ( HAL ) are among the stocks losing ground on Wednesday after posting declines the previous day.

Turning to other commodities, Hansen predicted that industrial metals will see a pick up in demand in the near future. He noted that the market has already priced in much of the economic pessimism that has come to dominate thinking recently, with many metals, like copper, falling to 52-week lows.

Meanwhile, the Saxo Bank analyst believes industrial metals will get a longer-term boost from a renewed interest in green-energy transformation.

Hansen pointed to Russia's invasion of Ukraine and the energy crisis it triggered for this potential demand. He argued that for Europe to become less reliant on Russian sources of energy, countries will need to invest in green energy, a process that requires industrial metals to build out the necessary infrastructure.

For more on commodities, see the latest on copper and iron ore, which continue to fall on recession fears .

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