Oil prices drop amid China’s COVID restrictions and possible interest rate hike

An IPC Petroleum France oil pump at sunset outside Sodron, near Reims, France, August 24, 2022. REUTERS/Pascal Rossignol/File Photo

SINGAPORE (Reuters) – Oil prices fell on Monday as expectations of global fuel demand were overshadowed by COVID-19 restrictions in China and the prospect of further interest rate increases in the United States and Europe.

Brent crude futures fell $1.01, or 1.1 percent, to $91.83 a barrel by 0630 GMT, after settling up 4.1 percent on Friday. US West Texas Intermediate crude fell $1.13 at $85.66 a barrel, or 1.3 percent, after rising 3.9 percent in the previous session.

Prices changed little last week as gains from a symbolic supply cut by the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, a group known as OPEC+, were offset by an ongoing shutdown in China, the world’s largest importer of crude.

China’s demand for oil may contract for the first time in two decades this year, as Beijing’s COVID-free policy keeps people indoors during the holidays and reduces fuel consumption. Read more

“Continuing headwinds from China’s renewed virus restrictions and further moderation in global economic activities may still raise some reservations about a more sustainable rally,” said Jun Rong Yip, market strategist at IG.

“The overall negatives seem to outweigh the positives,” Yip said, adding that the $85 mark for Brent crude prices could be looming.

Meanwhile, the European Central Bank and Federal Reserve are prepared to raise interest rates further to tackle inflation, which could raise the value of the US dollar against currencies and make dollar-denominated oil more expensive for investors.

“Demand concerns centered on the impact of higher anti-inflation interest rates and China’s policy on COVID-zero,” Vivek Dar, an analyst at the Commonwealth Bank of Australia wrote in a note.

However, global oil prices may rebound by the end of the year – supply is expected to shrink further when the European Union’s embargo on Russian oil takes effect on December 5th.

The Group of Seven will implement a Russian oil price cap to limit Russia’s lucrative oil export revenue after its invasion of Ukraine in February, and plans to take measures to ensure the continued flow of oil to emerging nations. Moscow describes its actions in Ukraine as a “special operation”. Read more

(Reporting by Florence Tan and Ghislaine Lehr); Editing by Kenneth Maxwell

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