Oil rally loses steam on fears of global economic slowdown

US crude stocks for the week to August 12 fell by 7.1 million barrels from the previous week

An pump jack near Karnes City, USA. Oil markets have been fluctuating with prices retreating from their highs amid growing concerns about a global economic recession. AP

Oil prices continued to oscillate, edging lower for the week over concerns about a slowing global economy and weaker fuel demand, after rallying on strong US economic data and a large draw of American crude inventory.

Brent, the benchmark for two thirds of the world's oil, gained 0.13 per cent to settle at $96.72 at the close of trading on Friday. West Texas Intermediate, the gauge that tracks US crude, closed up 0.3 per cent to end the week at $90.77 a barrel. Both benchmarks fell about 1.5 per cent on the week.

WTI strengthened towards the end of the week after the latest data from the US Energy Information Administration showed that crude oil stocks for the week ending August 12, excluding the Strategic Petroleum Reserves, decreased by 7.1 million barrels from the previous week.

Excluding the strategic reserves, US crude oil stocks are now at 425 million barrels, 6 per cent below the five-year average, according to the EIA.

“Prices are off from the lows of the week and this is primarily due to bigger than expected drawdown in the crude oil inventory data," said Naeem Aslam, chief market analyst at Avatrade.

"Most traders are concerned that extra supply coming from Opec and also the possibility of Iranian oil hitting the market. The good news is that US oil refineries intend to keep operating at or near full throttle throughout this quarter. In order to meet demand for more fuel, refiners are putting their concerns regarding the economic downturn and falling retail prices to the side."

In an interview with Bloomberg this week Opec secretary general Haitham Al Ghais said that global oil markets remained at risk of a supply squeeze.

Oil prices have remained volatile this year, with the outbreak of the Ukraine conflict in February jolting markets.

Years of underinvestment in the energy sector and the war, now in its sixth month, led to a sharp increase in commodity and energy prices, with Brent within touching distance of $140 a barrel in March.

Oil has given up much of the gains since the outbreak of the Ukraine war amid rising concerns about the global economy sliding into a recession.

In July, the International Monetary Fund lowered its growth forecast for the global economy for the second time this year, due to Russia’s war in Ukraine, a slowdown in China and rising inflation.

The fund projects global growth at 3.2 per cent in 2022 and 2.9 per cent in 2023, compared with a 6.1 per cent expansion last year. It fund warned if further risks materialise and inflation rises further, global growth could decline to about 2.6 per cent and 2 per cent in 2022 and 2023, respectively, which would put growth in the bottom 10 per cent of outcomes since 1970.

A potential agreement on the revival of the 2015 nuclear deal with Iran, which the US unilaterally withdrew from under the Trump administration, could add more oil to the market and ease the supply crunch caused by the Ukraine conflict.

Opec+, the oil producers group comprising Opec and its allies including Russia, will meet on September 5 to review their output.

Earlier this month, Opec+ agreed to increase its September output by a much slower 100,000 barrels per day, as it noted there was a “severely limited availability of excess capacity”, with “chronic underinvestment” reducing the ability of the oil industry to respond to supply shortfalls and a growth in demand.

Opec+ agreed in June to raise its July and August crude production by about 50 per cent to 648,000 bpd, fully restoring the 5.8 million bpd output that was cut during the Covid-19 pandemic.