Oil Plummets As Energy Crunch Fears Prove Largely Unfounded

Meanwhile, China exhibits questionable demand recovery from zero tolerance policy: File Image/Pixabay

In contrast to crude prices achieving daily and yearly gains at the end of 2022, the New Year is proving to be a roller coaster for the commodity, which on Tuesday suffered the biggest drop since mid-November due to a strong U.S. dollar and above-average temperatures in the U.S. and Europe easing fears of an energy crunch.

West Texas Intermediate fell $3.33 to settle at $76.93 per barrel, while Brent dropped $3.81 to settle at $82.10 per barrel.

Robert Yawger, analyst at Mizuho, said, "There is plenty of reason for concerns here - the China COVID-19 situation and the fear of recession in the foreseeable future is putting pressure on market."

Although China recently relaxed its zero-tolerance infection policy, the country's economic resiliency overall is questionable: it raised export quotas for refined oil products in the first batch for 2023, which traders attributed to expectations of poor domestic demand.

Tuesday's gloom came on the heels of Kristalina Georgieva, managing director of the IMF, stating that the economies of the U.S., Europe and China were all slowing simultaneously, which will make this year tougher than 2022 for the global economy.

In other oil related news on Tuesday, the Organization of Petroleum Exporting Countries (OPEC) boosted  supplies last month by 150,000 barrels per day (bpd) thanks to member Nigeria cracking down on oil theft and thus reversing a slump in contributions; total group output was 29.14 million bpd.

However, Nigeria's output was still barely half the level pumped a decade ago, and Bloomberg noted other members are "struggling with under-investment and operational disruptions," with Angola showing particular signs of strain.

As for the impact of OPEC overall, Commerzbank said it expects the global economic outlook to play a "much more important role" in oil price developments than production decisions made by the cartel; it also expects recovery "in key economic areas" to return Brent back towards $100 per barrel sometime during the second quarter.