Oil pares weekly decline, spurred by China demand concerns

Oil pared some of its second consecutive weekly loss, casting relief at the end of a week burdened by demand concerns, rising stockpiles, and the possibility the Biden administration may make a fresh release from emergency reserves.

West Texas Intermediate rose towards US$85 a barrel, but is still down more than 2 per cent this week after hitting the lowest since January. There is concern tjat consumption will take a hit as central banks raise rates and China sticks to its Covid Zero strategy. The US dollar's rally to a record has also been a headwind, though the greenback fell sharply on Friday (Sep 9) while risk assets rallied.

Despite the current bout of market weakness, US officials are hunting for ways to head off a feared spike in oil prices later this year, including the possibility of an additional release from strategic crude reserves. The officials are warning of a potential increase in prices this December when EU sanctions on Russian energy supplies take effect, unless other steps are taken.

Crude is down about US$40 from its high earlier this year, and the market has been beset by volatility ever since Russia invaded Ukraine. For much of the period since March, daily trading volumes have been below the 200-day average. Liquidity across commodity markets has also faced scrutiny amid Europe's energy crisis, with the region's ministers gathering in Brussels on Friday.

Crude's slump this week presents a challenge for the Organization of Petroleum Exporting Countries and its allies (Opec+) after they announced a nominal output cut at the start of the week, which triggered a short-lived rally. The reduction surprised many traders, who had expected no change from Opec+ no change.

"China lockdown fears continue to roll on but we are now seeing a pick-up in daily domestic flights again," said Keshav Lohiya, founder of consultant Oilytics. "This could be the change in sentiment that the crude oil market needs after relentless selling."

On Thursday, US government data showed a large build-up of crude inventories, which swelled by a greater-than-expected 8.8 million barrels. At the same time, a gauge of petrol demand sank below 2020 seasonal levels. Bloomberg

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