Oil prices post biggest weekly loss since March amid demand concerns

The market continues to worry that persistently high interest rates would slow down global economic growth, which in turn would hit fuel demand

Pump jacks at an oilfield in Argentina. Japanese bank MUFG expects Brent to average $94 a barrel in the fourth quarter of this year and $87 a barrel in 2024. Reuters

Oil prices closed higher on Friday but posted their biggest weekly loss since March amid demand concerns.

Brent, the benchmark for two thirds of the world’s oil, gained 0.61 per cent, or $0.51, to settle at $84.58 a barrel. West Texas Intermediate, the gauge that tracks US crude, rose 0.58 per cent, or $0.48, to close at $82.63 a barrel.

For the week, Brent dropped about 11 per cent while WTI posted a more than 8 per cent decline, on market worries that persistently high interest rates would slow down global economic growth, which in turn would hit fuel demand.

“Brent crude has fallen over $10 since the end of last month as surging global bond yields have crippled the global growth outlook,” said Edward Moya, senior market analyst at Oanda.

“Energy stocks have gone from Wall Street's best trade to it is time to abandon ship. US gasoline demand destruction is intensifying and – given how overbought the energy market was in September – momentum oil selling has been fierce,” he said.

The stronger-than-expected US jobs data, which is positive indicator for the economy, is also a concern for the oil market. A strong US economy could lift near-term oil demand, according to analysts, but, conversely, the statistics resulted in a stronger dollar, raising bets on another interest rate hike in 2023.

A strong greenback is typically negative for crude demand, making the commodity relatively more expensive for holders of other currencies.

The US jobs number "keeps alive the prospect of another rate hike and certainly backs the Federal Reserve's argument on the need for interest rates to stay higher for longer", ING analysts said in a note.

American crude stocks, an indicator of fuel demand, fell by 2.2 million barrels in the week that ended on September 29, according to the US Energy Information Administration.

However, total petroleum stocks increased by 6.5 million barrels in the same period, the data showed.

Meanwhile, growing worries among bond investors regarding the US government's spending and its widening budget deficit have led to a significant sell-off, causing Treasury prices to drop to their lowest in 17 years this week.

“After a blistering [third quarter], oil’s sharp reversal in recent trading days reinforces the notion that the rally may have run its course,” said Ehsan Khoman, head of commodities, ESG and emerging markets research for Europe, the Middle East and Africa at MUFG.

“There is likely reluctance among participants to push too much higher right now, with the market clearly in overbought territory.

“There is also possible nervousness that Opec+ and, specifically, Saudi Arabia could start to ease cuts earlier than scheduled if prices move much higher.”

The oil producers' group stuck to its current oil output cuts on Wednesday, with Saudi Arabia and Russia reaffirming supply reductions of 1.3 million barrels to the end of the year.

However Russia on Friday lifted a ban on the export of diesel through pipelines after it introduced the measure last month to stabilise the domestic market, according to a Tass news agency report.

The restrictions for gasoline exports, however, continue to remain in place.

"The government has removed restrictions on the export of diesel fuel delivered to seaports by pipeline transport provided that the producer supplies at least 50 per cent of diesel fuel produced to the domestic market," the report said.

The Russian cabinet introduced the temporary limitation of gasoline and diesel fuel exports on September 21, with only the Eurasian Economic Union countries including Armenia, Belarus, Kazakhstan and Kyrgyzstan exempted. The move contributed in propelling oil prices higher in September.

Investors are also concerned that the US Federal Reserve may not be done raising interest rates.

Recently, Fed chairman Jerome Powell warned markets that the central bank would be prepared to raise rates if data warranted it, even though the central bank appears to be near or at the end of its rate increase cycle.

He has also said rates would be held at a restrictive level until the Fed is convinced that inflation is moving down sustainably.

MUFG expects Brent to average $94 a barrel in the fourth quarter of this year and $87 a barrel next year.

“We continue to believe that the recent price rally is running out of steam, with the large leg-up already [having] materialised, and look for Brent to subside back into the mid-80s range for the remainder of the year,” Mr Khoman said.