Oil Prices Reverse Course On Fears Of Global Economic Slump Due To China

But FGE thinks the sector is still moving "fundamentally" in the right direction: File Image/Pixabay

With sentiment in the oil sector fluctuating almost constantly between optimism and pessimism, it was no surprise that the previous session's robust price gains due to the Organization of the Petroleum Exporting Countries (OPEC) imposing a token supply cut were obliterated on Tuesday by on-going reports of Covid-related lockdowns in China.

West Texas Intermediate rose 1 cent to settle at $86.88 per barrel, and Brent dropped $2.91 to settle at $92.83 per barrel as the China lockdowns fortified concerns about a global economic slowdown.

Ed Moya, senior market analyst at Oanda Corp., remarked, "Energy traders appear to be skeptical of any rallies as they digest a plethora of global economic challenges, a wrath of uncertainty to supplies, and looming crude demand destruction fears."

Indeed, Tuesday's concerns were supported by Saudi Aramco lowering its key Arab Light grade for next month's shipments to refineries in Asia to $5.85 per barrel above the Middle East benchmark, a decrease of almost $4 from September – and a signal that Saudi Arabia acknowledges economic challenges and faltering demand in this part of the world.

Aramco lowered all grades to Northwest Europe and the Mediterranean by $2 per barrel overall and raised prices for U.S. buyers by 50 cents except for Arab Light, which was left unchanged.

Jeff Brown, president of consultant FGE, discussed with Bloomberg television another factor heavily influencing oil trading: "Fundamentally we're probably moving in the right direction in terms of calming the oil market, but all of that friction out there related to Russia seems like it's only going in one direction."

As for OPEC's decision to impose a token cutback instead of a much-anticipated substantial output drop, Helima Croft, managing director and global head of commodity strategy at RBC Capital Markets, observed that it "signals a willingness to resume active market management to avert a major sell-off due to recession concerns or expectations of policy-driven supply increases; they are seeking to put short-sellers on notice that they will not easily surrender the recent gains and go gently into the night."

In other oil related news on Tuesday, Sitio Royalties Corp. announced that it will acquire rival U.S. oil and gas rights company Brigham Minerals Inc. in an all-stock merger valued at about $1.5 billion.

Also, in a bid to ward off calamity stemming from the European energy crunch this winter, Robert Habeck, economics and climate protection minister for Germany, announced that his country is going to burn coal and keep two nuclear power plants operational as a last resort to endure the cold season.

In a written statement, Habeck's ministry pointed out that "hourly crisis situations in the electricity system" this winter are "very unlikely, but cannot be completely ruled out at the moment."