Oil prices fall to near two-month lows as China concerns weigh on investor sentiment

Goldman Sachs cut its Brent oil forecast by $10 as futures drop below $90 a barrel

Traders on the floor of the New York Stock Exchange in New York. Brent crude is close to two-month lows as China demand concerns persist. Bloomberg

Oil prices fell to near two-month lows on Monday as demand concerns emanating from China, the world’s second-largest economy, continue to weigh on investor sentiment.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.6 per cent lower at $87.14 a barrel at 4.23pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.8 per cent at $79.47.

"Oil prices have slumped in the last few weeks as markets focus on the prospect for demand to deteriorate in line with a slower global economy and as China dithers on easing its restrictive stance on Covid-19," Edward Bell, senior director of market economics at Emirates NBD, said.

"Market sentiment around China’s zero Covid policy will be the biggest near-term drag on oil prices."

China is battling a rising number of Covid-19 infections in its urban centres, raising concerns that the top crude importer will reintroduce strict containment measures and lockdowns.

The National Health Commission said on Sunday it had recorded 26,924 local infections across the nation in the previous 24 hours.

Prices have also come under pressure amid reports of reduced demand for crude from Saudi Arabia, the largest exporter, and concerns that Russian production will not drop significantly after an EU ban on seaborne crude oil exports from the country comes into effect in December.

The Group of Seven advanced economies (G7) is set to place a price cap on Russian crude exports starting from December 5. Details of the level of the price cap are expected to be released later this week.

"If the price cap is too low ... then oil exports from the country may drop sharply and leave oil market balances short, even with an anticipated decline in demand," said Mr Bell.

An additional 1.1 million barrels per day of crude and 1 million bpd of diesel, naphtha and fuel oil will have to be replaced once the EU embargo on Russian crude oil and product imports comes into effect, the International Energy Agency said in a report last week.

Last week, Brent closed below $90 a barrel for the first time since October as the easing of geopolitical tension resulted in a sharp pull-back in prices.

Investment bank Goldman Sachs has cut its oil estimate by $10 for the fourth quarter and now forecasts Brent at $100 a barrel.

Swiss lender UBS expects the international benchmark to rebound above $100 a barrel over the coming months as US strategic petroleum reserve sales end and the EU ban on Russian crude exports comes into force.

Saudi lender Al Rajhi Capital expects oil prices to remain “stable”, supported by a “healthy” oil market balance and the decision by Opec+ to reduce its overall output by 2 million bpd.

The bank said the EU sanctions on Russian crude would “likely” offset any increases in supply from US shale producers, who have boosted drilling activity in response to higher prices.

Debt-ridden shale companies will aim to lower their “leverage positions” in the future, the bank said.

Emirates NBD is "bullish" on oil prices in 2023.

"Weighing the risks against each other, we suspect that in the immediate term negativity around demand and the global economy will be the stronger force," said Mr Bell.

"However, as we move into the final weeks of the year and into 2023 it will become clearer how tight supply conditions are with few buffers available in the way of strategic inventories."