Oil drops on strong US dollar and rising Covid-19 cases in China

Prices are falling for the second straight day as the IMF and World Bank warn of an increased risk of a global recession

Oil rallied for five straight days after the Opec+ announcement that it will slash oil output by 2 million barrels per day. Reuters

Oil prices extended their losses on Tuesday as a strong US dollar and a surge in coronavirus cases in China weighed on investor sentiment.

Brent, the benchmark for two thirds of the world’s oil, was trading 2.06 per cent lower at $94.21 a barrel at 3.37pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 2.33 per cent at $89.01 a barrel.

The US dollar index, a measure of the value of the greenback against a weighted basket of major currencies, was up 0.02 per cent at 113.16, inching towards September’s 20-year high of 114.78.

“Oil prices are paring recent gains for the second day as the International Monetary Fund and World Bank warn of an increased risk of a global recession,” Craig Erlam, senior market analyst at Oanda, said.

“Those warnings won't come as an enormous surprise, given the immense economic headwinds as a result of the pandemic and Russia's invasion of Ukraine,” Mr Erlam said.

Meanwhile, coronavirus cases in China, the world’s biggest oil importer, have hit their highest level in two months, stoking fears that major centres such as Shanghai and Shenzhen will face lockdowns again.

Oil prices ended a five-day gaining streak on Monday on signs of slowing economic growth in China. Services activity in the country contracted for the first time in four months, amid new outbreaks and stricter containment measures, according to an industry survey.

Oil prices have been rising since the 23-member Opec+ group of oil producers announced an output cut of 2 million barrels per day last week after its first in-person meeting in Vienna since March 2020.

Brent crude gained about 10 per cent last week.

Since the meeting, numerous investment banks and lenders have raised their oil price outlook for the remainder of 2022 and 2023.

Goldman Sachs raised its oil price forecast by $10 a barrel to $110 for the last three months of the year, and to $115 for the first quarter of 2023.

“The outlook for higher oil prices, in turn, is likely to put further pressure on the central banks to continue with their aggressive rate hikes at the upcoming meetings, in our view,” ADCB economists said in a research note last week.

“Despite the rising demand-side risks, we expect this Opec+ supply cut will leave the oil market in deficit for the whole of 2023,” they said.

Investors will be eagerly waiting for monthly oil market reports from the International Energy Agency and Opec to have more clarity on future demand, analysts said.