Oil on its way to punishment for loss

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Oil was heading for a debilitating weekly loss as evidence mounts that a global economic slowdown is fueling demand destruction, with prices collapsing to six-month lows as key time spreads contract.

West Texas Intermediate traded above $89 a barrel in Asia, with the US benchmark falling more than 9% this week. Official data showed that gas consumption in the US has decreased, while crude oil inventories have risen. The slump came even as Saudi Arabia raised prices and warned OPEC+ of scarce spare capacity.

While oil markets remain in backwardation, a bullish price pattern, widely observed divergences have narrowed sharply, pointing to an easing of the tightness. Brent’s prompt spread – the gap between the two closest contracts – was $1.62 a barrel in backwardation, down from more than $6 a week ago.

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After rising in the first five months of the year, the crude oil rally has reversed, with losses increasing this month after declines in June and July. The sell-off, which wiped out gains from Russia’s invasion of Ukraine, will ease inflationary pressures flowing through the global economy that have prompted central banks, including the Federal Reserve, to raise interest rates.

“The market is still struggling with a deteriorating demand pattern in the US, with pressure on refining capacity easing significantly,” said Stephen Innes, managing partner at SPI Asset Management.

Prices:

  • WTI for September delivery added 0.9% to $89.29 a barrel on the New York Mercantile Exchange at 7:36 AM in Singapore.
  • Brent before the October settlement rose 0.7% to $94.78 a barrel on the ICE Futures Europe exchange.
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The shift to a much tighter monetary policy has raised concerns among investors that growth will slow, putting the outlook for energy consumption at risk. The Bank of England warned that the UK is headed for more than a year of recession as it increased borrowing costs, while in the US a parade of Federal Reserve speakers vowed to continue an aggressive fight to cool inflation.

China has also shown signs of weakness, clouding the outlook for crude oil consumption at the largest importer. Recent data showed factory activity contracted, while China Beige Book International warned the economy was deteriorating.

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This week’s slump was partly driven by Libya bringing production back online after a period of turmoil, which could have allowed the OPEC member’s exports to stabilize at more than 1 million barrels per day and ease market tightness.

On Wednesday, the Organization of the Petroleum Exporting Countries and its allies, including Russia, agreed to a minuscule increase in collective supply for September, while warning that spare capacity was extremely limited. Saudi Arabia, the de facto leader of the group, has raised oil prices for buyers in Asia to a record.


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