Oil takes another hit as demand concerns fuel weekly decline

(Bloomberg) — Oil headed for a straight weekly loss, weighed down by demand concerns, rising inventories and the possibility that the Biden administration could make another release from emergency reserves.

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West Texas Intermediate headed toward $84 a barrel, but is still down nearly 4% this week after hitting its lowest level since January. There are fears that consumption will suffer as central banks raise interest rates and China sticks to its Covid Zero strategy. The dollar’s rally to a record was also a headwind.

Despite the current bout of market weakness, U.S. officials are looking at ways to stave off a feared spike in oil prices later this year, including the possibility of additional releases from strategic crude reserves. Officials are warning of a potential price hike this December when EU sanctions on Russian energy supplies come into effect unless other steps are taken.

Crude oil fell by nearly a third from its June highs as concerns about a global slowdown gained traction, reversing a rally sparked by Moscow’s invasion of Ukraine. On Thursday, Federal Reserve Chairman Jerome Powell said the US central bank was determined to contain price pressures, while the European Central Bank secured a huge interest rate hike, even as the region risks slipping into recession amid a worsening energy crisis.

The crisis in the European Union – triggered by a cut in gas supplies from Russia and further curbs on EU crude oil – will be in focus on Friday when energy ministers meet in Brussels. They will seek steps to ease the damage caused by the standoff with Moscow. Earlier this week, President Vladimir Putin threatened to cut off energy supplies to nations that support a price cap plan.

The drop in crude this week poses a challenge for the Organization of the Petroleum Exporting Countries and its allies after they announced a nominal output cut earlier in the week, sparking a short-lived rally. The reduction surprised many traders who had expected no change from OPEC+.

“While oil markets face negative sentiment in the near term, expectations of OPEC+ production cuts could support the price,” said Charu Chananna, market strategist at Saxo Markets Singapore Pte. The producer group “hinted earlier this week about its intention to keep crude oil prices around the $100 mark,” she said.

On Thursday, US government data showed a large build in crude inventories, which swelled by a higher-than-expected 8.8 million barrels. At the same time, the gasoline demand indicator fell below seasonal levels of 2020.

Widely watched time spreads have narrowed, signaling an easing of market tensions. Brent’s forward spread – the difference between its two closest contracts – was 98 cents a barrel in the opposite direction, down from $1.21 a barrel last Friday and almost $2 two weeks ago.

This week’s MLIV Pulse survey focuses on energy and commodities. It is short and anonymous. Please click here to share your opinion.

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