Demand Fears Drag WTI Price Lower

Oil prices fell on Tuesday as concern returned about the prospect of more interest rate hikes and COVID-19 lockdowns weakening fuel demand, reversing a two-day rally on OPEC+’s first output target cut since 2020.

The US benchmark had been trading since Sunday without settlement due to the Labor Day holiday. WTI prices are down more than 2% from the usual time of settlement on Monday, Refinitiv Eikon data show.

Brent crude settled at $92.83 a barrel, losing $2.91, or 3%. US West Texas Intermediate (WTI) fell from Monday’s trading to settle at $86.88 a barrel, up 1 cent from Friday’s close.

The OPEC+ news is now in the market and the focus has temporarily shifted to economic and inflationary concerns amongst which the two relevant factors are the extended COVID lockdowns in China and Thursday’s ECB rate decision.

China has eased some COVID-19 curbs but extended lockdowns in Chengdu, which added to worries that high inflation and interest rate hikes will hit oil demand. The European Central Bank is widely expected to lift rates sharply when it meets on Thursday. A stronger US dollar, which was up about 0.6% on better-than-expected US services industry data, also put pressure on oil prices.

The reading on services sector activity fed into expectations that the Federal Reserve will keep raising interest rates, which could trigger a recession and bring down fuel demand.

Tight supplies and concerns about an economic slowdown that might happen in the future pressure prices. This has created a lot of uncertainty in the market.

On the supply side, signs that an agreement to resurrect Iran’s nuclear deal with world powers was less imminent challenged crude prices by reducing the odds that OPEC+ would move forward with its output reduction plan.

The European Union’s foreign policy chief said on Monday he was less hopeful about a quick revival of the deal.

The Organization of Petroleum Exporting Countries and allies led by Russia, known as OPEC+, decided on Monday to cut their October output target by 100,000 barrels per day (bpd). Prices rose on Friday ahead of the meeting and after the decision.

As a result of the Labour Day holiday, weekly US inventory reports from the American Petroleum Institute and Energy Information Administration will be released on Wednesday and Thursday, a day later than usual.