Crude prices fell on Friday and posted a weekly decline as rising Covid-19 cases in China, the world's largest crude importer, weighed on the outlook for oil demand.
Brent, the benchmark for two thirds of the world’s oil, settled 2.41 per cent lower at $87.62 a barrel at the close of trading. West Texas Intermediate, the gauge that tracks US crude, closed 1.91 per cent lower at $80.08.
"Oil prices are continuing to retreat against the backdrop of increasingly gloomy economic prospects and surging Covid cases in China which risk further restrictions and lockdowns," Craig Erlam, senior market analyst at Oanda, said.
"Brent crude has broken back below $90, testing the mid-October lows...could Opec+ go even further if the outlook continues to deteriorate when it meets again in a couple of weeks?"
Last month, the group of 23 oil producing countries decided to slash its collective output by 2 million barrels per day in response to a slowing global economy. Opec+ will hold its next meeting on December 4.
Oil prices rallied earlier this week after reports that Poland, a Nato member, was hit by a stray Russian missile, triggering fears of an escalation in the war.
On Wednesday, Polish President Andrzej Duda said there were no indications the missile that killed two people was an “intentional attack” and that even though “it is highly probable” the missile was fired by Ukrainian anti-aircraft defence, ultimate responsibility lay with Moscow, which launched a barrage of missile attacks in Ukraine on Tuesday.
“Some of the geopolitical risk that sent oil higher earlier this week is coming off the table,” Edward Moya, senior market analyst at Oana, said.
“With no immediate escalation in the war in Ukraine, we could see energy traders fixate on the Russian crude price cap that takes hold early next month.”
The Group of Seven advanced economies (G7) is set to put a price cap on Russian oil exports on December 5 to limit Russia’s ability to fund its military offensive in Ukraine. An EU ban on seaborne Russian crude also comes into effect the same day.
The outlook for oil demand has been affected by signs of slower economic growth in US and China — the world's two biggest economies.
The Federal Reserve Bank of Philadelphia's monthly manufacturing index, a gauge of manufacturing activity in the US mid-Atlantic region, dropped to negative 19.4 in November from negative 8.7 in October, its lowest reading since the early months of the pandemic.
China has stepped up testing in its urban centres, with Covid cases crossing 25,000.
“Fears are growing that the spread won’t ease soon as cases have spread across populous regions of Guangzhou and Chongqing,” Mr Moya said.
“Inventory levels remain a key concern for the oil market so we might see limited downside from here.”
On Tuesday, the International Energy Agency lowered its global oil demand growth estimate for next year again on weak economic growth in China, Europe’s energy crisis and a strong dollar.
The Paris-based agency now expects oil demand to grow by 1.6 million barrels per day in 2023, down from its previous estimate of 1.7 million.
Global demand for diesel and gas oil is estimated to fall to 400,000 bpd in 2022, from 1.5 million bpd last year, before declining slightly in 2023, said the IEA, which blamed the reduction on “persistently high” prices and a slowing economy.
Diesel, used in everything from transportation to industrial processes, is the backbone of the global economy.