Oil prices settle lower as inflation and recession fears dent demand outlook

Markets reacted to various elements, including the latest economic data showing inflation in the US at a four-decade high

A trader at the New York Stock Exchange. Markets are digesting the latest US economic data after Opec+'s largest output cut since 2020. AFP

Crude prices gave up early gains and settled lower on Friday, after demand worries and fears of a potential global recession soured outlook.

Traders weighed the possibility of continued measures to curb four-decade high US inflation amid weak Chinese demand.

Brent, the benchmark for two thirds of the world’s oil, slipped 3.11 per cent to settle at $91.63 a barrel. West Texas Intermediate, the gauge that tracks US crude, closed down 3.93 per cent to $85.61 a barrel.

The latest data from the US Bureau of Labour Statistics showed that annual headline inflation in the world's largest economy was up 8.2 per cent in September, down from its peak of about 9 per cent in June but still near the highest levels since the early 1980s.

Core inflation for the month was up 6.6 per cent from a year ago, the biggest 12-month gain since August 1982.

The latest data is likely to prompt the US Federal Reserve to raise interest rates a fourth consecutive time by 75 basis points when it meets in the first week of November. The move can further slow economic momentum and destroy already weakening demand for crude.

“The headlines for oil continue to be very bearish for the crude demand outlook,” Edward Moya, senior market analyst at Oanda said.

“Intense market volatility does not bode well for growth prospects and that has sent the dollar higher.

The demand outlook continues to remain weak from the world’s two largest economies. Although the US economic activity is not “going to fall off a cliff”, it is weakening. The more immediate bearish driver for oil is the risks of more lockdowns from China, Mr Moya said.

“The US seems like it will be driven to a recession by the inflation fighting Fed, and while China will not likely have any major pivots with their zero-Covid policy,” he added.

On Thursday, the International Energy Agency slashed its global oil demand growth estimates for 2022 and 2023, citing the possibility of a recession in several European countries and growing risks for emerging economies.

The IEA's forecast came at a time when Opec lowered its global oil demand estimates for this year and the next earlier in the week, citing Covid-19 restrictions in China, economic challenges in Europe and inflationary pressures in key economies.

Naeem Aslam, chief market analyst at Avatrade, said that “traders are still very much digesting the message from the US crude inventory data, which confirmed that supply is on the rise in the US”.

US crude oil stocks increased by 9.9 million barrels last week on the back of a 7.7-million-barrel drawdown from the Strategic Petroleum Reserve (SPR), said the US Energy Information Administration (EIA).

The EIA expects US crude oil production to hit 12.4 million barrels per day in 2023, higher than this year's estimate of 11.7 million bpd.

Oil prices rallied last week after the 23-member Opec+ group of oil producers announced an output cut of 2 million bpd.

The war in Ukraine, now in its eighth month, coupled with rising recession fears, broadening inflation pressures and a slowdown in China, both the world's second-largest economy and the biggest importer of crude, prompted the International Monetary Fund to cut its global growth forecast for 2023.