Oil fluctuates amid tight market, demand concerns and possible return of Iranian crude

A three-day rally in crude prices last week lost momentum amid weaker Chinese economic data

Iran could pump more oil into the market and ease the supply crunch if the nuclear deal with world powers is revived. Reuters

Oil prices remained volatile on Monday slumping in early trading, then paring losses before dipping again amid a tight market, growing concerns about a slowdown in demand in China and the possibility of Iranian crude coming back to the market.

Brent, the global benchmark for two thirds of the world's oil, was trading 1.09 per cent lower at $95.67 a barrel at 7.45pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.85 per cent at $90 a barrel.

"There remain many factors influencing the oil price right now from a tight market to a diminishing growth outlook and a potential Iran nuclear deal," said Craig Erlam, a senior market analyst at Oanda.

Oil prices had slumped earlier due to "lacklustre Chinese data last week" that showed demand concerns continue to outweigh any supply-side issues, despite warnings around upcoming tightness in the market from the new Opec secretary general, Emirates NBD’s Mena economist Daniel Richards said.

In an interview with Bloomberg last week, Opec secretary general Haitham Al Ghais said global oil markets remained at risk of a supply squeeze.

China, the world's biggest importer of crude, also cut lending rates last week to revive demand as its economy slowed unexpectedly in July, with factory and retail activity slumping under Beijing's “zero-Covid” policy.

“Traders believe that slower economic growth will adversely influence the prices,” said Naeem Aslam, chief market analyst at Avatrade.

“Traders are also paying attention to the power supply situation in China, and power restrictions in some regions could affect economic activity as China’s south-western Sichuan [province] began limiting electric power supply.”

The prospect of Iranian crude returning to the market is also being closely watched by traders.

The leaders of the US, Britain, France and Germany discussed efforts to revive the 2015 Iran nuclear deal during a call on Sunday.

The EU and US last week said they were studying Iran's response to what the EU has called its “final” proposal to revive the deal, under which Tehran curbed its nuclear programme in return for sanctions relief.

A potential deal would help Iran to pump more oil into the market and ease the supply crunch caused by the Ukraine conflict.

The prospects of Iran returning to market could become clearer over the course of this week "although that has been suggested many times this year and yet here we are. We could see WTI remain choppy around $90 and Brent hover above $92 for a little while longer yet," Mr Erlam said.

Mr Aslam said he believed the momentum for a three-day rally last week had waned “as there are more bears in the market than bulls”.

“Investors believe that if the Fed continues on its hawkish monetary policy, it will create more obstacles for US economic growth, and that could negatively affect oil demand.”

Federal Reserve chairman Jerome Powell is expected to speak at the US central bank’s annual symposium from Thursday to Saturday this week in Jackson Hole, Wyoming, and possibly indicate the pace of future interest rate increases.

The Fed's next meeting is set for September 20 and September 21, where it may raise interest rates by 75 basis points for a third consecutive time as it attempts to arrest inflation, which is running at a four-decade high.

The US dollar index hit a new five-week high on Monday after Fed officials, including Federal Reserve Bank of Richmond president Thomas Barkin, indicated that the central bank is expected to continue with its aggressive monetary tightening policy before the Jackson Hole symposium.

At the last meeting in July, when the central bank approved a 0.75 percentage point rate increase, Fed officials indicated they were likely to press forward with the rate increases to bring down inflation to their preferred 2 per cent target.

“The dollar bulls are back in force,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

“The stronger dollar is not only a headache for the rest of the world, it is also a headache for the US companies as the revenues they make outside the US lose value when converted back to US dollars.”