The optimism about China reopening that fuelled crude price gains over the past few sessions was finally eclipsed on Wednesday by a familiar analytical fear: that of a possible U.S. recession.
Brent fell 94 cents to settle at $84.98 per barrel and West Texas Intermediate fell 70 cents to settle at $79.48 per barrel after James Bullard and Loretta Mester, presidents of the St. Louis Fed and Cleveland Fed respectively, said rates needed to rise beyond 5 percent to control rampant inflation.
This was despite U.S. data showing that retail sales and manufacturing production declined more than forecast in December, which initially gave traders hope that the banks would pause rate hikes.
Also causing concern was Microsoft Corp announcing it would eliminate 10,000 jobs and take a $1.2-billion charge as the company braces for potential recession.
ING told customers in a note that "Coming on the back of the weakness in retail sales, the steep drop in industrial production and news of more job lay-offs adds to fears the U.S. could already be in recession."
Ironically, while recession fears – and accompanying demand destruction - dominated analytical concern on Wednesday, Amin Nasser, CEO of Saudi Aramco, told media that he is worried about tightness of global crude supplies.
He said, "For crude oil, we are in a situation where there is a spare capacity that is helping to mitigate interruptions, however I am not so sure about the mid-to-long term, because as the spare capacity erodes we will not be having the capability to mitigate any short or long term interruptions like what happened with Russia-Ukraine crisis."
Nasser added, "We should be worried about the mid to long term: I think there will be an issue in meeting the growing demand."
Indeed, the latest oil market report released Wednesday from the International Energy Agency forecast that global oil demand will hit a record 101.7 barrels per day (bpd) this year, with nearly half of that coming from China; the agency also expects oil supply growth to slow to 1 million bpd concurrently.
However, all of this is predicated on China's economy rebounding, and Robert Yawger, analyst at Mizuho, told media that the Chinese economy cannot restart if there are not enough people to restart it: a reference to reports of surging infection rates and higher mortality rates in the wake of the country abandoning its draconian lockdown policies (although much of these allegations come from the World Health Organization, which many critics say caused unnecessary panic during the pandemic with its messaging).
Meanwhile, the latest chapter in the saga of whether or not the European Union's sanctions against Russia are effective was written on Wednesday by Rystad Energy, which pegged the former Soviet Union's losses at about 500,000 bpd – not as devastating as initially thought - and that India and China remain key buyers of Russian crude.
As for factors that could bolster crude prices in the immediate future, a Reuter's poll showed analysts expecting a U.S. crude stock drawdown of about 600,000 barrels last week; the American Petroleum Institute was set to release industry data at 2130 GMT.