Brent futures for March delivery saw a 0.5% loss, falling 43 cents to $81.67 per barrel, while U.S. crude dropped 39 cents, or 0.5%, to $76.54 per barrel. Both benchmarks experienced a more than 4% drop on Tuesday, with Brent experiencing its largest one-day loss over three months.
Market analyst Yeap Jun Rong of IG noted that "warning signs of global recession, China's lackluster recovery with surging COVID-19 cases, renewed strength in the U.S. dollar, and dampened risk sentiment are all catalysts keeping oil prices in check overnight." In addition, the Chinese government increased export quotas for refined oil products in the first batch for 2023, indicating expectations of weak domestic demand.
Top oil exporter Saudi Arabia may also cut prices for its Arab Light crude grade to Asia in February, following a set at a 10-month low for this month, due to ongoing concerns over oversupply in the market.
Global Economic Struggles and Rate Hikes Could Impact Fuel Consumption
Analysts from Haitong Futures pointed out that the market is worried about the impact of macro factors such as downward economic pressure. The head of the IMF warned that much of the global economy would have a difficult year in 2023 as major drivers of global growth – the United States, Europe, and China – all show weakening activity. In December, the Federal Reserve (Fed) also raised interest rates by 50 basis points (bps) following four consecutive increases of 75 bps each. If the Fed continues to increase rates, it could slow the economy and reduce fuel consumption.
Weak Dollar Offers Some Support for Oil Prices
Despite the negative factors impacting oil prices, the weakening dollar on Wednesday offered some support. A weaker dollar typically boosts demand for oil as dollar-denominated commodities become cheaper for holders of other currencies. According to a preliminary Reuters poll, U.S. crude oil stockpiles are expected to have risen by 2.2 million barrels, while distillate inventories are expected to be down.
The American Petroleum Institute will release data on U.S. crude inventories at 4:30 p.m. EDT on Wednesday, and the Energy Information Administration, the statistical arm of the U.S. Department of Energy, will release its figures at 10:30 a.m. on Thursday.
