Oil Plummets As Focus Returns To China Dragging Down Economy, Demand

But analysts disagree on oil's current status and future: File Image/Pixabay .

In the confusing world of crude trading, prices on Monday tanked due to concerns that an economic slowdown would ruin demand for the commodity.

This was in marked contrast to Friday's trading behaviour, in which prices escalated due to worries that the Organization of the Petroleum Exporting Countries (OPEC) would not boost output in the face of high demand that seemed to defy both inflation and the high cost of gas at the pump.

The only constant seems to be physical supply: underlying signals continue to show an extremely tight market around the world.

West Texas Intermediate dropped $4.73 to settle at $93.89 per barrel, and Brent plummeted $9.98 to settle at $100.03 per barrel.

The main source of trading angst was China, whose zero tolerance Covid policy has resulted in a  contraction of factory activity; purchasing managers' indexes also weakened in South Korea and the euro region's four largest members.

Harry Altham, energy analyst for EMEA and Asia at StoneX Group, said China's hard-line approach to infections will continue to "negatively impact oil demand until at least November of this year, when a strategic change in Covid policy could be announced."

Phil Flynn, senior market analyst at Price Futures Group Inc., was puzzled by the schizophrenic reports coming from the crude sector and said, "There is still a disconnect with economic data and what we're seeing on the supply side; the oil market is still very tight, and the market is going to be on edge going into OPEC."

Given oil traders' flip back to worrying about waning demand instead of tight supplies, then presumably news on Monday that would have previously pleased them is now an added source of consternation: Libya's crude exports more than doubled in the second half of July after a blockade was lifted on July 15, from a low of 589,000 barrels per day (bpd).

Libya's return to normal output may also take some of the heat off OPEC and its allies, who will meet Wednesday to discuss whether to raise production in September as requested by U.S. president Joe Biden (for the record, de facto leader Saudi Arabia has repeatedly made it clear that it won't increase production and considers the world market to be fairly balanced).

Christof Ruhl, senior analyst at Columbia University's Center on Global Energy Policy, said,  "I think they'll do very little: after the Biden visit they might pay a bit of lip service, but not produce much more in fact, and even the promise won't be earth-shattering.

"They're genuinely worried about a recession."

But even on this score analysts disagree: on Monday Helima Croft, managing director and global head of commodity strategy at RBC Capital Markets, said in a note,  "While President Biden's visit to Saudi Arabia produced no immediate oil deliverables, we believe that the kingdom will reciprocate by continuing to gradually increase output."

Still, group think overall leans towards the possibility of lowered demand for oil, and on Monday analysts in a Reuters poll reduced their forecast for 2022 average Brent prices to $105.75, their first downward revision since April.

Their estimate for WTI fell to $101.28.