Oil extends losses amid strong dollar and economic slowdown concerns

Futures fell despite a sharp drop in US crude stocks

US crude inventories, an indicator of fuel demand, fell by 4.6 million barrels last week. Reuters

Oil prices extended losses on Thursday amid a strong dollar and growing concerns of an economic slowdown in the US.

Brent, the benchmark for two thirds of the world’s oil, was trading 1.65 per cent lower at $81.75 a barrel at 2.01pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 1.82 per cent at $77.72 a barrel.

On Wednesday, Brent settled 1.95 per cent lower at $83.12 a barrel, while WTI was down 2.10 per cent at $79.16.

US economic activity was “little changed” in recent weeks, with employment growth moderating, the Federal Reserve said in its Beige Book survey on Wednesday.

Overall price levels rose moderately and the rate of price increases appeared to be slowing, the central bank said.

Inflation in the world’s largest economy slowed again in March as the Fed’s interest rate increases helped to ease price pressures on households and businesses.

The Consumer Price Index rose at a slower rate of 0.1 per cent last month, down from 0.4 per cent in February.

Inflation slowed to 5 per cent on an annual basis, Labour Department data showed last week.

Fears of further interest rate increases have also weighed on oil futures.

Rising interest rates limit economic growth and strengthen the dollar, making oil more expensive for holders of other currencies.

The US Dollar Index — a measure of the value of the greenback against a weighted basket of major currencies — has gained nearly 1 per cent over the past week.

“Oil prices declined as the dollar rebounded and after a mixed oil inventory report raised demand concerns,” said Edward Moya, senior market analyst at Oanda.

US crude inventories — an indicator of fuel demand — fell by 4.6 million barrels last week, according to the US Energy Information Administration.

However, petroleum demand showed “unexpected weakness” with stocks rising 1.3 million barrels against expectations of a 1.5-million-barrel drop, Mr Moya said.

China, the world's second-largest economy and top crude importer, recorded higher-than-expected economic growth in the first quarter as the lifting of Covid-19 curbs earlier this year helped to improve consumer spending.

The country’s gross domestic product increased by 4.5 per cent on a yearly basis in the first three months of the year, higher than the 2.9 per cent recorded in the previous quarter, according to the National Bureau of Statistics.

"With Covid abating, it is becoming increasingly clear that some stagflationary forces are however longer lasting — namely, the forces that underpin our commodities supercycle," said Ehsan Khoman, head of emerging markets research for Europe, the Middle East and Africa at MUFG Bank, Japan's largest lender.

"Better-than-expected Q1 [ first-quarter] GDP data from China, alongside other strong Chinese activity readings, has not been sufficient to deliver the positive catalyst to oil prices this week given lingering concerns over the broader demand outlook and weaker refinery margins."

MUFG expects the oil market to return to sustained deficits from June onwards, given accelerated growth in emerging markets, with demand primarily coming from China and India, Russian oil decoupling and lethargic US supply.

"These forces, together with severe Opec+ cuts, in tandem with tight micro fundamentals — thin spare production capacity and acutely low inventories amid a dearth of structural underinvestment — is set to drive oil prices constructively higher with Brent hitting well north of $90 a barrel by the summer," Mr Khoman said.

Brent is still up since Opec+ producers announced voluntary oil production cuts of 1.16 million bpd on April 2.

The output cuts, which will be in place starting from May until the end of December, are aimed at supporting oil market stability.

Russia, a part of the 23-member alliance of producers, also said it would extend its output cut of 500,000 bpd until the end of this year.

Moscow had previously pledged to curb its production until June in response to the price caps imposed by the West on exports of its crude oil and refined products.