Crude oil is headed for longest slump since 2020 amid growth concerns

Oil is headed for a third monthly decline, the longest losing run in more than two years, on concern that tighter monetary policy and China’s economic slowdown will impact crude demand. 

West Texas Intermediate dropped as much as 3.4 per cent to trade below $90 a barrel, putting it on course for a monthly decline. Bearish sentiment is mounting amid slowing economic growth for major oil consumer China while Fed officials reaffirmed their commitment to raising interest rates to cool rapid inflation.

“This morning’s price weakness is a summation of overall sentiment for the month of August, in which rising central bank interest rates are seen as the brake pedals to oil demand growth,” said Harry Altham, an energy analyst for StoneX Group.

Low liquidity has exacerbated crude’s steep price swings, frustrating oil bulls including hedge fund manager Pierre Andurand, who opined Thursday that the futures market is “broken.” In the past week, oil has traded in a range of close to $10 a barrel. 

The decline in futures comes even as the US supply picture has turned bullish, with crude stockpiles dropping for a third week while inventories in the largest storage hub declined for the first time in over two months last week. 

 

While there has been significant unrest in both Libya and Iraq in recent days, oil output in both OPEC members appears to be unaffected so far. Separately, talks to revive an Iranian nuclear deal that may unlock greater crude exports have dragged on, and Russian output has been maintained at levels higher than prior expectations.

An agreement to revive the 2015 nuclear deal is “not out of reach” if the text of the final accord is stronger with better guarantees for Iran, Iranian Foreign Minister Hossein Amirabdollahian said at a press conference in Moscow. 

Oil’s decline in August marks the latest chapter in a tumultuous year, with prices driven higher in the first half by Russia’s invasion of Ukraine, then undermined as central banks shifted tack and Moscow managed to keep most exports flowing.

Crude’s recent slump prompted OPEC+ heavyweight Saudi Arabia to float the idea the alliance could cut output, although Russian media reported the group wasn’t discussing such a move at present.

The main theme “is pessimistic macro-economic expectations, coupled with tight supply from low inventories,” said Zhou Mi, an analyst at Chaos Research Institute in Shanghai, which is affiliated with Chaos Ternary Futures Co.

Prices:

• WTI for October delivery was down $1.46 to $90.18 a barrel at 11:08 a.m. in New York.
• Brent for October settlement, which expires Wednesday, dropped $2.78 to $96.53 a barrel
• The contract has lost about 12 per cent in August
• November Brent fell 1.7 per cent

Key time spreads suggest that tightness in the market has eased. WTI’s prompt spread -- the difference between the two nearest contracts -- was 37 cents a barrel in backwardation, compared with $1.87 a month ago.

“This just seems like a violent retracement in prices and spreads in oil after they failed to maintain their strength yesterday in what is an extremely illiquid market,” said Scott Shelton, an energy specialist at ICAP.