Oil fell nearly 2% on Friday, posting a second weekly decline amid weaker demand in China and concerns about a further rise in US interest rates.
Brent crude was down $2.16, or 2.4%, to $87.62 a barrel. West Texas Intermediate (WTI) crude was down $1.56, or 1.9%, to settle at $80.08 per barrel.
Both indicators posted weekly losses, with Brent down about 9% and WTI about 10%. The market structure of both oil benchmarks has changed to reflect dwindling supply concerns.
Crude oil reached record highs earlier this year following Russia’s invasion of Ukraine. In addition, the front-month futures contract rose to a massive premium over later-dated contracts; this is a sign that people are worried about the immediate availability of oil and are willing to pay generously to secure the supply.
Supply concerns are easing. The current WTI contract is trading at a discount to the second month, a structure known as contango (depor) for the first time since 2021, according to Refinitiv Eikon data.
This will also benefit those who want to put more oil in stocks for later, especially when stocks are still low. The deeper the contango, the more likely the market will store these products.
Brent still moved the opposite, but recently Brent’s premium over six-month barrels dropped to $3 a barrel the lowest level, since April.
While China, which sources say is looking to slow its crude oil imports, is seeing an increase in COVID-19 cases, hopes for less aggressive rate hikes by the US have been dashed by statements from some Federal Reserve officials.
The Fed is expected to raise interest rates 50 basis points (bps) lower, after raising rates by 75 basis points four times in a row at its December 13-14 policy meeting, according to a poll. According to some, this expectation is too optimistic.
The COVID-related situation in China continues to wreak havoc on this market. As soon as they try to say they will reopen, the market is pricing in too much optimism, but then the reality on the ground happens opposite to this promising analysis.
As the European Union’s ban on Russian crude oil approaches on December 5, the possibility that more barrels from Russia will put pressure on the spot crude oil market also weighed on futures prices.
Recession concerns have dominated this week as the Organization of the Petroleum Exporting Countries (OPEC) and its partners have slashed supply. OPEC+, which started new supply cuts in November, will hold a policy meeting on 4 December.
On the demand side, concerns about the economic slowdown remain.