Oil sinks as worrying demand signals gather on multiple fronts
(Bloomberg) – Oil tumbled as everything from Wall Street sentiment to falling demand for physical barrels of crude pointed to an economy heading for a slowdown.
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Brent crude futures fell below $90 a barrel for the first time in six weeks and West Texas Intermediate settled at the lowest since September. While Federal Reserve officials reiterated their determination to keep raising interest rates and warned of difficulties ahead, lackluster demand from crude oil traders this winter signaled that a slowdown could already be underway in the energy markets.
Setbacks were evident along most of the oil complex. Prices for crude oil shipments at shopping malls from Houston to Singapore fell, surprising traders who expected prices to rise ahead of the European Union’s impending ban on Russian oil imports. The oil curve, a reflection of where the market sees future prices, has collapsed as the U.S. oil market is poised to tip into a structure that signals oversupply for the first time since last year.
Crude supplies have collapsed as reality sets in that Chinese demand is most likely getting worse before it gets better, said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “First-month time spreads – the backbone of tight markets – are the lowest since March 2021, signaling that demand concerns are real and investors should be cautious when buying the dip.”
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While lower-than-normal inventories and geopolitical risks led to occasional spikes, recession fears weighed heavily on crude prices in the second half of this year. JPMorgan Chase & Co. forecast that the United States will enter a “mild” recession next year due to rising interest rates. Meanwhile, traders are keeping their eyes peeled for rising Covid cases in China as an indicator of crude consumption.
A short burst of optimism sparked by China’s decision to ease some quarantine restrictions last week fizzled as it became clear that rising Covid cases there will continue to hamper trips.
Oil traders are also having to deal with soaring rates for chartering vessels to transport oil around the world. On Wednesday, benchmark revenues for supertankers capable of carrying 2 million barrels topped $96,000 a day. Ships on the U.S.-China route now cost nearly $15 million, the most since April 2020. The strength in freight is weighing on the structure of the crude market, Citigroup analysts said.
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