Oil prices swing after sharp decline on demand concerns and strong dollar

The US Energy Information Administration raised its projections for global oil demand in its latest short-term outlook report

An oil storage tank in Texas. Global oil demand growth is expected to rise by an average of 2.1 million barrels per day throughout 2022. Reuters

Oil prices fluctuated on Thursday after their sharp decline from the previous day due to growing fears of a slump in crude demand, triggered by lockdowns in China to contain rising Covid-19 infections, amid rising interest rates and a strong dollar.

Brent, the benchmark for two thirds of the world's oil, which fell more than 5 per cent on Wednesday, was trading 1.47 per cent higher at $89.29 a barrel at 10.32pm UAE time.

West Texas Intermediate, the gauge that tracks US crude, which slid about 6 per cent on Wednesday, was up 2.21 per cent, at $83.75 a barrel.

Oil recovered some lost territory in early trading on Thursday against a backdrop of rising geopolitical risks and Russian President Vladimir Putin warning that his country would not supply energy to countries that back a proposed price cap by the US and Europe on Moscow's crude in response for its military offensive in Ukraine.

However, lockdowns across China affecting about 65 million people across dozens of cities and monetary tightening by central banks of developed economies are also weighing on energy markets.

That led the market to give up earlier gains after the US Energy Information Administration issued its short-term outlook report, in which it raised its projections for global oil demand.

Global oil demand growth will rise by an average of 2.1 million barrels per day throughout 2022 and by an average of 2 million bpd in 2023, the EIA said.

It estimates that 99.4 million bpd of petroleum and liquid fuels were consumed globally in August 2022, up 1.6 million bpd from August 2021.

“As a result of high natural gas prices globally, we increased our forecast for oil consumption in the fourth quarter of 2022 and the first quarter of 2023 as electricity providers, particularly in Europe, may switch to oil-based generating fuels,” the EIA said.

“The possibility of petroleum supply disruptions and slower-than-expected crude oil production growth continues to create the potential for higher oil prices, while the possibility of slower-than-forecast economic growth creates the potential for lower prices.”

It expects Brent to average $98 a barrel in the fourth quarter of 2022 and $97 a barrel in 2023.

US crude oil production is projected to average 11.8 million bpd in 2022 and 12.6 million bpd in 2023, which would set an annual record for American crude production. The current record is 12.3 million bpd, which was set in 2019.

In a report on Thursday, Emirates NBD economists described the sell-off in oil on Wednesday as “disorderly” and said market moves were “exaggerated”, given the scale of news and data flow.

“The scale of moves will likely be making Opec+ officials anxious and prompt more intervention to support markets,” the Emirates NBD economists said.

The 23-member alliance of Opec+ agreed on Monday to cut its October output by 100,000 bpd, reverting to August production levels.

The move was largely in response to a slowing global economy, demand headwinds and a potential Iran nuclear deal that could bring more crude to the market.

“Given the volatility in the market, coupled with ample uncertainty, Opec+ has not ruled out further action — either at an emergency meeting or when they next meet on October 5,” said Ehsan Khoman, head of emerging markets research at MUFG Bank.

“What is clear is that whether dubbed an Opec+ price floor, the return of the Opec+ put or a line in the sand, recent rhetoric from Opec+ ministers highlighting of the disconnect between oil’s financial and physical markets may force it to continue to act.”

Last month, the International Energy Agency forecast higher oil demand growth this year as Europe switches to oil to generate power, shunning natural gas, which is becoming pricier.

The Paris-based agency expects global oil demand growth to jump 380,000 bpd to 2.1 million bpd this year.

The US dollar, in which oil is priced, also hit a record high on Wednesday against major currencies, amplifying inflationary pressures and putting more pressure on the euro, sterling, yen and yuan.

The European Central Bank raised interest rates by a record 75 basis points on Thursday in a bid to tame surging inflation.

And the US Federal Reserve could make a third consecutive 75-basis-point interest rate increase when it meets on September 21 as inflation is running beyond its target rate at a 40-year high.

“With central banks jacking up rates to quell inflation, investors are increasingly apprehensive of the quantum of recession that may transpire in the months ahead,” Mr Khoman said.