Oil prices drop on recession concerns as interest rate rises loom

Oil prices dropped on Monday on concerns that high inflation and rising interest rates could dampen global economic growth, hitting fuel demand. Both the benchmarks fell more than 2 per cent in midday trade before recovering some of the losses later in the day.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.73 per cent lower at $90.68 a barrel at 6.24pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, was down 0.86 per cent at $84.38 a barrel. Oil prices had risen in early trading as China, the world’s top importer of crude, began easing Covid-19-related movement restrictions in Chengdu, capital of the south-western Sichuan province.

The city had been locked down since September 1 after a rise in the number of coronavirus infections but authorities started allowing people out of their homes on Monday. A mandatory Covid test requirement is in place once a week to control the spread of the pandemic. The world's second-largest economy is enforcing strict rules as part of its 'zero-Covid' strategy.

“Anxiety over economic growth is the main catalyst for oil markets at the moment and so long as there is a hawkish tone to central banks and China maintains its restrictive Covid policies, oil could be exposed to more downside,” said Emirates NBD economists Khatija Haque, Edward Bell and Daniel Richards.

Central banks in the US, UK and Europe are increasing interest rates to cool inflation. Earlier this month, the European Central Bank raised its key interest rates by 75 basis points to tame record inflation, while the US Federal Reserve is expected to increase rates further when it meets on Tuesday and Wednesday.

The Fed already raised interest rates by 75 basis points in its past two meetings to bring inflation down from a 40-year high.

"Oil prices have been dragged lower by the red-hot US dollar, as well as growing demand-side fears," Han Tan, chief market analyst at Exinity, told The National. "Markets are increasingly expecting a global recession amid another expected wave of rate hikes by central bankers this week."

The global economy is expected to slow down this year due to higher inflation and the continuing conflict in Ukraine, as well as the pandemic-related restrictions in China.

In July, the International Monetary Fund lowered its growth forecast for the global economy to 3.2 per cent this year, from its previous projection of 3.6 per cent in April.

Brent rose close to $140 per barrel in March after Russia's invasion Ukraine. However, it fell in the subsequent months on growing recession fears hitting fuel demand.

Meanwhile, the Opec group of oil producers agreed to cut its October output by 100,000 barrels per day on demand concerns after it raised production at the same level this month.

Last week, the International Energy Agency also cut its estimates for 2022 global oil demand growth amid China lockdowns and a continuing slowdown in the Organisation for Economic Co-operation and Development area.

The Paris-based agency, in its latest report, estimated global oil demand growth at 2 million bpd. This was marginally down from its 2.1 million bpd projection in August.