Back To Losses For Oil As Sentiment Pendulum Swings Back To Demand Fears

Meanwhile, locked down China awaits a glut of incoming crude supplies: File Image/Pixabay

Oil's two day rally came to a crashing halt on Thursday as the reality of tightening global supplies took a back seat to analytical fears that aggressive bank lending policies would lead to demand destruction.

Specifically, West Texas Intermediate dropped to just over $88 per barrel (compared to a 4 percent rise during the previous two sessions) after U.S. Federal Reserve chair Jerome Powell said that it's "very premature to be thinking about pausing" a rise in interest rates after his agency hiked rates again by 75 basis points.

This caused a retreat from equities and crude, with Brent settling down $1.49, or 1.5 percent, at $94.67 per barrel, and WTI settling down $1.83, or 2.0 percent, at $88.17.

Ed Moya, senior market analyst at OANDA, said, "Oil is battling both a weakening global economic outlook and a surging dollar…it seems these bearish drivers won't be easing up anytime soon."

Still, demand destruction to the degree that analysts fear and some have predicted remains just a theory: despite skyrocketing inflationary prices, the number of Americans filing new claims for unemployment benefits fell last week, demonstrating that the labour market remains strong; plus, productivity rebounded at 0.3 percent in the third quarter, according to the U.S. Labor Department.

In other oil related news on Thursday, China, whose zero-tolerance Covid infection policy has been blamed for the country's economic slowdown, is expecting an influx of seaborne crude to the tune of almost 9.3 million barrels per day (bpd), about 500,000 bpd more than September.

According to Bloomberg, in recent weeks top refiners including PetroChina, Sinopec and ChemChina made the crude purchases in the expectation that the Covid restrictions would be lifted; "The new lockdown threw a curve ball on that theory," said Mark Williams, a research director at Wood MacKenzie.

China's top health body said that the nation's zero-tolerance approach remains the overall strategy to fighting Covid-19, even though most of the world's health bodies have abandoned what they consider to be a needless and impossible-to-achieve objective.

Given all of these circumstances, Tamas Varga, oil analyst at PVM, suggested that Thursday's trading behaviour would be replicated at least in the short term:  "Rising anxiety about stalling growth will inevitably impact global oil demand and another downward revision in the next set of forecasts is not a far-fetched idea."