Oil sinks further to test Opec’s resolve amid demand concerns

OIL fell for a third day as demand concerns continue to escalate and the US dollar rose, joining a sell-off of assets from equities to metals.

West Texas Intermediate futures dropped below US$88 a barrel, after falling for a third consecutive month in August in the longest run since April 2020. 

Investors are focusing on tighter monetary policy around the world, which could crimp economic growth and eventually hit oil demand. The lockdown of the Chinese megacity of Chengdu to contain a Covid-19 outbreak added to the negative sentiment.

“The fuel for the drop is most certainly what is driving every asset class lower this week, and that is the hawkish rhetoric from the Federal Reserve,” said Ole Hansen, Saxo Bank’s head of commodity strategy. “In addition, the demand outlook for China looks dire – it’s settling into a 9-10 million barrel a day consumption rate compared with 10-12 in recent years.”

Oil declined by more than 20 per cent in the 3 months till August, overturning all of the gains since Russia’s invasion of Ukraine at the end of February. It has prompted Saudi Arabia to signal that the Organization of Petroleum Exporting Countries and its allies (Opec+) could cut supply. The group is scheduled to gather next Monday (Sep 5) to discuss output policy.

“What it could translate into is Opec potentially once again cutting production if prices get too low – that makes me believe that the downside is limited ahead of Monday’s meeting,” Hansen said.

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Among the items that Opec+ ministers may weigh is a US-led plan to cap the price of Russian crude in a bid to deprive Moscow of funds amid the war in Ukraine. The proposal has been gathering support, with the UK government signalling its approval. Group of Seven finance ministers including Treasury Secretary Janet Yellen are due to discuss the proposal on Friday.

Strength in the greenback has added to headwinds for US dollar-denominated commodities, as the pricier currency makes them more expensive for overseas buyers. The Bloomberg Dollar Index rose towards the highest level on record following a run of 3 monthly gains. BLOOMBERG