World oil prices fell on Monday as China’s Covid restrictions caused concern over weakening domestic demand, which has fallen to levels not seen for 20 years.
Prices have also been inhibited by the potential for further interest rate hikes in both the US and Europe.
The cost of Brent crude futures dropped 1.1% per barrel on Monday to $91.83 a barrel by 0630 GMT, while West Texas Intermediate crude was down $1.13 at $85.66 a barrel.
“Demand concerns centred on the impact of rising interest rates to combat inflation and China’s Covid-zero policy,” Commonwealth Bank of Australia analyst Vivek Dhar wrote in a note.
Rising global fuel demand was overshadowed by increasing Covid restrictions in China. Over 65 million people in more than 30 cities are affected, including many in Chengdu, a city of 21 million citizens in the country’s southwest, where an indefinite lockdown was imposed at the start of the month.
China’s oil demand could contract for the first time in two decades this year, as officials in some cities have been urging citizens to avoid unnecessary travel in the lead-up to the country’s five-yearly Party Congress in mid-October.
“The lingering presence of headwinds from China’s renewed virus restrictions and further moderation in global economic activities could still draw some reservations over a more sustained upside,” Jun Rong Yeap, a market strategist at IG, said.
“The overall negatives seem to outweigh the positives,” said Yeap, adding the $85 mark for Brent crude prices could be in sight.
Rising Global Interest Rates
Meanwhile, the European Central Bank and the US Federal Reserve are prepared to increase interest rates further to tackle inflation, which could lift the value of US dollar against currencies and make dollar-denominated oil more expensive for investors.
Still, global oil prices may rebound towards the end of the year – supply is expected to tighten further on December 5 when a proposed European Union embargo on Russian oil is due to take effect.
The G7 will implement a price cap on Russian oil to limit Russia’s lucrative oil export revenue following its invasion of Ukraine in February, and plans to take measures to ensure that the oil could still flow to emerging nations.
- Reuters, with additional editing from Alfie Habershon
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