Crude oil price may decline on worries of economic slowdown exacerbating

1 Sep 2022 , 07:56 AM

On worries that tighter monetary policy will hurt GDP and as China continues with its Covid Zero strategy, oil was poised for a third monthly decline, the longest losing streak in more than two years.

West Texas Intermediate plunged as much as $4.09 a barrel from on Wednesday, putting it on target for a monthly decline of almost 10%. While China, the top oil importer in the world, has seen its economy stagnate in Asia, Europe is engulfed in an energy crisis that could signal the start of a recession.

This week, central banks, most notably the US Federal Reserve, reaffirmed their convictions that hiking interest rates is necessary to curb rapidly rising inflation, creating additional obstacles to economic expansion and oil consumption.

Nevertheless, traders are keeping an eye on a number of supply-related problems that could lead to an increase in prices. Although there has been considerable turmoil recently in both Libya and Iraq, oil production in both OPEC countries so far doesn’t seem to have been impacted. Separately, the Iranian nuclear deal revival discussions that could increase crude shipments have dragged on, and Russian production has remained higher than anticipated.

The drop in oil prices in August is the latest episode in a turbulent year that saw prices spike in the first half due to Russia’s invasion of Ukraine before falling in the second as central banks changed their strategy and Moscow was able to maintain the majority of shipments.

Due to the recent decline in crude prices, OPEC+’s largest member Saudi Arabia suggested that the group’s output be reduced, despite Russian media reports to the contrary.

The difficulties China faces were emphasized by data on Wednesday. For the second consecutive month, factory activity decreased in August as the economy was hampered by Covid-19 outbreaks, a housing market meltdown, and power outages.

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