Brent, the benchmark for two thirds of the world’s oil, was trading 0.82 per cent lower at $89.97 a barrel on Tuesday at 11.30am. West Texas Intermediate, the gauge that tracks US crude, dropped 0.69 per cent to $88.21 a barrel.
Both benchmarks fell heavily on Monday, with Brent settling 1.6 per cent lower and WTI dropping 2.2 per cent.
“Oil prices dropped heavily overnight as markets responded to rate hiking commentary from Fed [the US Federal Reserve] officials,” Edward Bell, senior director of market economics at Emirates NBD Capital said in a note to investors.
Crude oil's drop below $90 per barrel level was “partly due to the overbought market conditions”, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said.
The drop in prices is driven by “higher for longer rates expectations [that] increased odds for recession”, she added.
Fed governor Michelle Bowman said monetary policy in the world’s largest economy needs to stay restrictive for “some time” to bring inflation back down to the 2 per cent target.
At a banking conference on Monday, she echoed other Fed officials including chairman Jerome Powell who in August, said the monetary policy in the US will remain tight.
Signs of a rise in oil supplies that could partially ease the current tight supply dynamics in the market have also pulled prices back from recent highs.
Iraq's northern oil export route through Turkey will begin operations “this week”, Turkey's Energy Minister said on Monday.
“Within this week, we will start operating the Iraqi-Turkey pipeline … which will be able to supply half a million barrels of oil [per day] to the oil market,” Alparslan Bayraktar said during a panel session at Adipec.
In late March, Turkey halted the flow of oil produced in the region after an arbitration court ruled in favour of Baghdad, saying Ankara had breached a 1973 agreement when it allowed Iraqi Kurdish authorities to pump without Baghdad's consent.
Crude prices have rallied more than 40 per cent since the end of June, driven by Opec+ production caps and the brightening prospects of crude demand as the Chinese economy, the second largest in the world, continues to recover.
The 23 Opec+ member states have implemented total production curbs of 3.66 million bpd, or about 3.7 per cent of global demand. This includes a 2 million bpd reduction agreed last year, and voluntary cuts of 1.66 million bpd, announced in April and extended to December 2024.
The supply dynamic of the market has been further tightened by Russia’s move to temporarily ban petrol and diesel exports in response to domestic shortages.
The International Energy Agency expects a “substantial” crude market deficit in the fourth quarter of this year due to Opec+ output cuts.
The agency expects global oil demand to rise by 1.5 million bpd in the second half of this year, compared with the first half, exceeding supply by 1.24 million bpd during that period.
The Opec+ group is meeting in Vienna on Wednesday to discuss the current market dynamics. It is widely expected to stick to its current output policy.
Ahead of the meeting, Suhail Al Mazrouei, the UAE's Minister of Energy and Infrastructure, said the Opec+ alliance is doing its “best” to maintain a healthy balance of supply and demand in the market.
Speaking at Adipec, Mr Al Mazrouei said the group was monitoring improvements or declines in major export markets particularly in China, the world's second-largest economy and top crude importer.
“Many dynamics are moving on and we hope that the growth in China picks up … because the whole world economy is dependent on China,” Mr Al Mazrouei said.
“My worry is not an undersupplied market in the short term. My worry is an undersupplied market in the longer and midterm.”