Increasing Concern Over Global Economy Causes 2%-Plus Oil Price Drop

Meanwhile, OPEC will likely maintain output levels, say experts: File Image/Pixabay

While the mini-rally of oil prices in the New Year slowed in the previous session due to investors taking profits, prices on Tuesday fell by over 2 percent on news that U.S. business activity contracted in January for the seventh straight month.

Investors' concerns about a global economic slowdown were also kindled by a bigger than expected build in U.S. oil inventories: according to market sources citing American Petroleum Institute figures, crude stocks rose by about 3.4 million barrels in the week ended Jan. 20, three times as much as forecast in a Reuters poll.

Even though S&P Global reported that Euro zone business activity made a surprise return to modest growth in January, Brent on Tuesday fell $2.06, or 2.3 percent, to $86.13 per barrel; West Texas Intermediate fell $1.49, or 1.8 percent, to $80.13 per barrel.

Addressing other negative factors that influenced trading, Edward Moya, senior market analyst at OANDA, said in a note that, "some energy traders are still sceptical on how quickly China's crude demand will bounce back this quarter."

JP Morgan also contributed to the sudden mixed feelings about 2023's fortunes when, after raising its forecast for Chinese crude demand, it maintained its projection for a 2023 Brent price average of $90 per barrel.

The bank explained in a note, "Absent any major geopolitical events, it would be difficult for oil prices to breach $100 in 2023 as there should be more supply than demand this year."

However, the sudden drop in oil prices on Tuesday were also said to be the outcome of the commodity succumbing to broader market pressure, after disappointing results from economic-activity bellwethers such as Union Pacific Corp and 3M Co. caused investors to shun risk. 

Meanwhile, delegates of the Organization of the Petroleum Exporting Countries (OPEC) told media they expect an advisory committee of ministers to recommend keeping oil production levels unchanged when they meet next week, as they await clarity on Chinese consumption and the impact of sanctions on Russian supply.

Raad Alkadiri, an analyst at Eurasia Group, remarked, "OPEC+ looks increasingly likely to keep output levels unchanged even after the scheduled meeting: prices have firmed, supply remains tight, and significant levels of uncertainty prevail for both supply and demand."

Goldman Sachs Group Inc. and Energy Aspects Ltd. predict that the cartel will only start to increase production in the second half of the year, when they believe accelerating demand will tighten the market.