Oil prices swung on Wednesday, losing earlier gains, and slumped to six-month lows as investors weighed fall in US inventories against recession fears hitting demand and the possibility of supply increasing if Iranian oil resumes entering global markets.
Prices rose in the morning session as US crude inventories fell by about 448,000 barrels for the week ended August 12. They then declined but pared losses later in the day.
Brent, the global benchmark for two thirds of the world's oil, was trading 1.41 per cent higher at $93.64 per barrel at 10pm UAE time on Wednesday. West Texas Intermediate, the gauge that tracks US crude, was up 1.73 per cent at $88.03 a barrel.
"There are growing downside risks as a result of the growth outlook and ongoing uncertainty around Chinese Covid restrictions," said Craig Erlam, senior market analyst, UK and Europe, Middle East and Africa, at Oanda.
China, the world's second-largest economy and a top importer of crude, continued to carry out strict movement restrictions to stem the spread of the coronavirus. The country cut lending rates on Monday to revive demand as the economy slowed unexpectedly in July, with the factory and retail activity slumping under Beijing’s zero-Covid policy.
The International Monetary Fund this month lowered its growth forecast for the global economy to 3.2 per cent this year, from its previous forecast of 3.6 per cent in April, due to Russia’s war in Ukraine that has exacerbated inflationary pressures and derailed the momentum of the recovery from the pandemic and the slowdown in China.
Progress made on the Iranian nuclear deal is also affecting oil prices.
The US on Tuesday said it was studying the Iranian response to a European Union proposal to revive the 2015 nuclear deal, named the Joint Comprehensive Plan of Action, which was abandoned by former president Donald Trump in 2018.
“It will require some time to digest what has been provided to the EU and in turn what has been provided to us,” US State Department spokesman Ned Price said.
The deal would help Iran to pump more oil into the market and ease the supply crunch caused by Russia’s military offensive in Ukraine and subsequent sanctions imposed by the US and the UK on the import of Moscow’s crude.
“There is one particular event that is driving the price of oil the most and that is the progress made on the Iranian nuclear deal," said Naeem Aslam, chief market analyst at Avatrade.
“Yesterday, the EU called the dialogue highly constructive and that is sending a signal to the market that it may be only a matter of time before Iranian oil returns to the market.”
The Iran nuclear deal could be a "big positive for oil supply and, therefore, a negative for prices", said Mr Erlam.
"There is no shortage of scepticism around the prospects for the JCPOA to be revived though, but we may be reaching a point where that will become clear," he said. "For now, Brent appears to have decent support at around $92."
A revival of the nuclear deal between the US and Iran is expected to add 4 million barrels of Iranian oil per day to the market to ease supply concerns, said Ipek Ozkardeskaya, an analyst at Swissquote Bank.