Oil Claws Back Some Ground After Steepest Drop in More Than Year

Oil clawed back a little ground after signs of weaker demand and concerns about a slowdown in global growth sparked the steepest one-day drop in more than a year.

(Bloomberg) — Oil clawed back a little ground after signs of weaker demand and concerns about a slowdown in global growth sparked the steepest one-day drop in more than a year.

West Texas Intermediate edged toward $85 a barrel after sinking 5.6% on Wednesday. The drop came after official US data showed the weakest seasonal demand for gasoline in 25 years and a small build in crude holdings at the Cushing, Oklahoma, storage hub. Adding to headwinds, a private survey showed US companies added the fewest number of jobs since the start of 2021.

Crude’s tumble came despite announcements from Saudi Arabia and Russia that voluntary production cuts would remain in place through the end of the year. In addition, an OPEC+ committee recommended no change to collective curbs.

After rallying strongly in the third quarter — with the US benchmark topping $95 a barrel near the end of September — crude’s upsurge has faltered. While the gains had fueled speculation that a return to $100 oil was on the cards, others remained skeptical, with notable bear Citigroup Inc. making the case that prices were on course to reverse as the market returned to a surplus.

Oil’s sharp retreat has come against a backdrop of rising worries about elevated interest rates and the global economy that has rattled equity and bond markets in recent weeks. If sustained, it will help to cool inflationary pressures as central bankers including those at the Federal Reserve debate whether they’ve hiked borrowing costs enough. Monthly US jobs data Friday will be scrutinized for clues on the economy’s health.

The focus “is shifting from supply tightness to demand concerns,” said Charu Chanana, market strategist at Saxo Capital Markets Pte in Singapore. “We could still see spikes in oil prices in the fourth quarter amid concerns of a deficit, but going into 2024, recession concerns could grow louder and cap gains.”

On Wednesday, Riyadh and Moscow — the most influential OPEC+ members — said they would stick with supply curbs, which total about 1.3 million barrels a day. The restrictions have helped to drain inventories, with US holdings at the Cushing site nearing levels regarded as the minimum needed for operations.

The rally in oil has reversed as “bond markets have been signaling economic weakness, and US gasoline demand continues to lag,” Citi analysts including Francesco Martoccia and Ed Morse said in a note. “Collapsing prices likely informed the OPEC+ decision to stay the course on output cuts to year-end.”

The fall in oil prices will be a welcome boost for major buyers, including in Asia. Earlier this week, India’s Oil Minister Hardeep Puri said that prices need to drop to levels of about $80 a barrel to be good for consumers.

After the midweek drop, key metrics continue to point to tight conditions. WTI’s prompt spread — the difference between its two nearest contracts — was $1.68 a barrel in backwardation, a bullish pattern. While that’s down from more than $2 a barrel last week, it compares with 68 cents a month ago.

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