Oil prices sank on Tuesday after a two-day rally as concern returned about weaker demand and the prospect of more interest rate hikes trumped support from Opec+’s first output target cut since 2020. Brent crude was down $3.26, or 3.4 per cent, to $92.48 at 11:27 a.m. EDT (1527 GMT). US West Texas Intermediate (WTI) fell from Monday’s trading to $86.37, down 50 cents or 0.6pc from Friday’s close.
Technical factors, including that the U.S. benchmark has been trading since Sunday without settlement due to the Labor Day holiday, helped support WTI over Brent. WTI still held close to multi-month lows. Extended Covid-19 lockdowns in Chengdu, China, have added to worries that high inflation and interest rate hikes will hit demand. The European Central Bank is widely expected to lift rates sharply when it meets on Thursday.
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,” said Tamas Varga of oil broker PVM. “Undoubtedly, they raise fears of demand destruction.”
A stronger US dollar, which was up about 0.6pc on better-than-expected American services industry data, also put pressure on oil prices. The reading on services sector activity fed into expectations that the US Federal Reserve will keep raising interest rates, which could trigger a recession and bring down fuel demand.
On the supply side, signs that an agreement to resurrect Iran’s nuclear deal with world powers was less imminent challenged limited crude prices by reducing the odds that Opec+ would move forward with its output reduction plan, said Bob Yawger, director of energy futures at Mizuho.