Oil sinks as demand fears take steam out of OPEC-led rally
Oil prices fell yesterday as concern returned about the prospect of more interest rate hikes and COVID-19 lockdowns weakening fuel demand, reversing a two-day rally on OPEC+’s first output target cut since 2020.
Brent crude settled at $92.83 a barrel, losing $2.91, or three per cent. U.S. West Texas Intermediate (WTI) fell from Monday’s trading to settle at $86.88 a barrel, up one cent from Friday’s close.
The U.S. benchmark had been trading since Sunday without settlement due to the Labor Day holiday. WTI prices are down more than two per cent from the usual time of settlement on Monday, RefinitivEikon data show.
“The OPEC+ news is now in the market and the focus has temporarily shifted to economic and inflationary concerns amongst which the two relevant factors are the extended COVID lockdowns in China and Thursday’s ECB rate decision,” TamasVarga of oil broker PVM said.
China has eased some COVID-19 curbs but extended lockdowns in Chengdu, which added to worries that high inflation and interest rate hikes will hit oil demand. The European Central Bank is widely expected to lift rates sharply when it meets on Thursday.
A stronger U.S. dollar, which was up about 0.6 per cent on better-than-expected U.S. services industry data, also put pressure on oil prices.
The reading on services sector activity fed into expectations that the Federal Reserve will keep raising interest rates, which could trigger a recession and bring down fuel demand.
“Basically, it’s all about tight supplies and concerns about an economic slowdown that might happen in the future,” Phil Flynn, an analyst at Price Futures group in Chicago, said.
On the supply side, signs that an agreement to resurrect Iran’s nuclear deal with world powers was less imminent challenged crude prices by reducing the odds that OPEC+ would move forward with its output reduction plan, Bob Yawger, director of energy futures at Mizuho said.
The European Union’s foreign policy chief said on Monday he was less hopeful about a quick revival of the deal.
“You might not get an OPEC production cut if the Iranians don’t bring barrels to the market,” Yawger said.
The Organisation of Petroleum Exporting Countries and allies led by Russia, known as OPEC+, decided on Monday to cut their October output target by 100,000 barrels per day (bpd). Prices rose on Friday ahead of the meeting and after the decision.
As a result of the Labor Day holiday, weekly U.S. inventory reports from the American Petroleum Institute and Energy Information Administration will be released on Wednesday and Thursday, a day later than usual. –Reuters