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Oil Prices Drop Amid Concerns Over China's COVID Cases and Western Economic Recession

Crude oil prices fell on Wednesday as investors expressed concern over the impact of rising COVID cases in China on the country's economic recovery and the possibility of western economies entering a recession.

Oil Tanks
Oil Tanks

At 4:30 ET, US crude futures were down 0.8% at $78.90 per barrel, while the Brent contract fell 0.6% to $84.19 per barrel.

China recently announced that it would no longer require inbound travelers to quarantine, which had previously helped push crude prices to their highest levels in three weeks. However, this policy has led to a surge in COVID cases, putting pressure on hospitals and potentially delaying any increase in demand for oil.

Additionally, central banks in western economies are tightening monetary policy in response to rising inflation, which could negatively impact demand for energy products.

Supply Factors Adding Uncertainty to Oil Market

There are also supply-side factors contributing to uncertainty in the oil market. The US is currently experiencing a deep freeze, with oil refineries working to resume operations at shut down facilities due to the winter storm.

Russian President Vladimir Putin has also indicated that Moscow intends to ban oil sales to countries that follow the G7 price cap, which began in December. Analysts at ING noted that "how the Russia/Ukraine war evolves will be important for oil markets in 2023."

Meanwhile, the American Petroleum Institute is set to release data on US crude inventories, which are expected to have decreased following last week's 3 million barrel draw. Analysts at ING pointed to a shift in the mentality of US producers, who are now focusing on shareholder returns and showing discipline in capital spending, supply chain issues, labor shortages, and rising costs as factors that may lead to modest supply growth in the coming year.