Oil Prices Fall as Concerns of U.S. Recession Outweigh Optimism of China's Lifting of COVID-19 Curbs
Oil prices fell on Wednesday, with Brent futures dropping 1.1% to $84.98 a barrel and U.S. West Texas Intermediate (WTI) crude falling 0.9% to $79.48. The early gains were lost as concerns about a potential U.S. recession outweighed optimism about China's lifting of COVID-19 restrictions, which is expected to boost demand for crude in the world's top oil importer.
The oil prices reversed gains early in the afternoon, following Wall Street's main indexes, as comments from U.S. Federal Reserve (Fed) officials sparked worries that the central bank may not pause interest rate hikes anytime soon. The markets initially reacted positively to U.S. data, which showed that retail sales and manufacturing production declined more than forecasted in December, with hopes that the Fed would now ease up on interest rate hikes.
However, the gains were short-lived as St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester said that rates needed to rise beyond 5% to control inflation. Microsoft Corp also announced that it would eliminate 10,000 jobs and take a $1.2 billion charge as cloud-computing customers reassess spending and the company braces for a potential recession.
Supporting oil prices early in the session, China reported economic data that beat forecasts after the country started rolling back its zero-COVID policy in early December. According to the International Energy Agency (IEA), China's lifting of restrictions should boost global oil demand to a record high this year, while price cap sanctions on Russia could dent supply.
Rystad Energy, a consultancy, said that the effect of sanctions on Russian crude exports after 1.5 months of the European Union embargo and G7 price cap has not been as devastating as some predicted. The losses were at about 500,000 barrels per day, and India and China remain key buyers of Russian crude.
Analysts expect a drawdown in U.S. crude stocks of about 600,000 barrels last week, which could provide some price support, according to a Reuters poll. The American Petroleum Institute (API) was set to release industry data on Wednesday, while the U.S. government reports on Thursday, both of which were delayed a day due to Monday's Martin Luther King Day federal holiday.