Oil prices extended losses on Wednesday on renewed Covid lockdowns in China and a rise in US crude inventories. WTI price continued to decline, dropping below $89.0 per barrel. If the WTI price declines further, it may encounter support near $85.7 per barrel, while further resistance can be found at $90.3 per barrel and further up at $97.8 per barrel.
On Wednesday, reports of renewed lockdowns in the manufacturing hub of Guangzhou in China weighed on oil prices. The uncertainty over oil demand from China has influenced oil prices considerably over the past few months. China is the world’s largest energy importer and the possibility of lifting zero-Covid restrictions has increased oil demand expectations. However, over the weekend new Covid cases once more spiked in China. Chinese health officials reiterated their determination to keep Covid measures in place, for the time being, causing oil prices to plummet again this week.
An unexpected build in US crude oil inventories pushed oil prices further down on Wednesday. US Crude oil inventories increased by 3.9M barrels during the past week, against expectations of only 0.3M barrels and a drop of 3.1M barrels the week before.
Concerns of political uncertainty in the US are causing market turmoil this week, putting pressure on oil prices. The US mid-term elections will decide which party controls Congress and the results so far appear to be close. If the Democratic party loses control of Congress, it will have a hard time passing important fiscal legislation later this year. The Biden administration is tasked with bringing inflation down and at the same time avoiding sending the country into recession. The government’s task will become much harder if it cannot promote its fiscal agenda. Concerns that political instability may tip the country into recession, reducing oil demand, have sent oil prices plummeting.
In addition, aggressive rate hikes stifle economic activity, undercutting oil demand. Last week the US Federal Reserve raised interest rates by 75 basis points, bringing its interest rate to 4.0%. As central banks turn towards a more hawkish monetary policy global recession concerns rise, putting pressure on oil prices.
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