Oil prices dropped by more than $1 on Wednesday to their lowest level before the Russian invasion of Ukraine, as Covid-19 restrictions in China, the world’s largest crude importer, and expectations of further interest rate hikes sparked fears of a global economic recession and lower fuel demand.
By 04:20 GMT, Brent crude futures dropped $1.35, or 1.5%, to $91.48 per barrel, after falling 3.0% in the previous session. The session low for the contract was $91.35, the lowest level since February 18.
US West Texas Intermediate crude Futures fell $1.55, or 1.8%, to $85.33 per contract. The benchmark index reached a low of $85.17, the lowest level since January 26.
After the Organization of the Petroleum Exporting Countries (OPEC) and its partners, known as OPEC+, resolved to reduce output by 100,000 barrels per day in October, oil prices retreated.
Edward Moya, a senior market analyst at OANDA, wrote in a note, “Given the laundry list of global economic woes, it wasn’t difficult to discount the OPEC+ production reduction bounce.”
Despite some better-than-expected US services data, the outlook for global growth is bleak, and this is bad news for crude prices.
Tina Teng, an analyst at CMC Markets, cited a strong US dollar, aggressive rate hikes, a spike in bond yields, and a slowdown in China’s economic development as reasons affecting oil prices.
Teng continued, “In summary, oil futures markets are pricing in stagflation in the global economy.”
China’s strict zero-Covid policy has stifled people’s movement and oil demand in the world’s second-largest consumer, Chengdu, which is home to 21,2 million people.
The country’s exports and imports slowed sharply in August, falling significantly short of projections. Imports of crude oil declined 9.4% in August compared to the same month a year ago, according to figures released by customs on Wednesday. Due to weak profits, outages at state-owned refineries and lower operations at private plants restrained demand.
Additionally, investors anticipate additional interest rate increases to combat inflation. On Thursday, the European Central Bank is widely expected to increase interest rates significantly. On September 21, the US Federal Reserve will meet following the ECB meeting.
The dollar reached a 24-year high against the yen and record highs against the Australian and New Zealand dollars on Wednesday after US economic data bolstered the belief that the Federal Reserve will continue aggressively tightening monetary policy.
However, prospects of tighter oil supplies in the United States lent some support to prices.
A preliminary Reuters poll released Tuesday shows that US crude inventories will likely have decreased for the fourth consecutive week, falling by an estimated 733,000 barrels in the week ending September 2.
According to data from the Department of Energy, crude stockpiles in the US Strategic Petroleum Reserve (SPR) declined by 7.5 million barrels in the week ending September 2 to 442.5 million, the lowest level since November 1984.
Due to a national holiday on Monday, the American Petroleum Institute and Energy Information Administration will release their weekly inventory data one day later than usual, on Wednesday and Thursday, respectively.