Oil prices slipped on Wednesday, retreating for the 3rd day in a row. The effect of OPEC’s output cut is wearing off, while global recession fears mount and Covid restrictions tighten in China. WTI price dropped below the $87.0 per barrel level on Wednesday. If the WTI price declines, it may encounter support near $82.1 per barrel, while resistance can be found at the $93.7 per barrel level.
A recent flare-up of Covid cases in China has forced the local authorities to ramp up anti-Covid measures. China is the world’s largest energy importer and concerns of renewed lockdowns are reducing oil demand, putting pressure on oil prices.
Global recession fears outweighed tight supply concerns this week, as markets had time to digest OPEC’s output cut. Increasingly hawkish Fed rhetoric promoted a risk aversion sentiment, boosting the dollar and putting pressure on oil prices. Aggressive rate hikes stifle economic activity, undercutting oil demand, and pushing oil prices down. World Bank President David Malpass and International Monetary Fund Managing Director Kristalina Georgieva warned earlier this week of a growing risk of global recession while stressing the need to bring inflation under control.
Last week OPEC+ decided on a massive output cut of 2 million BPD starting in November. OPEC performed the largest reduction since 2020 in a bid to raise prices, led by Saudi Arabia and Russia. OPEC+ members strive to reclaim the $100 per barrel key level despite mounting global recession risks. Oil prices have been on the rise since OPEC’s unexpected decision and many analysts predict that oil prices will climb back up above $100 per barrel before the end of the year.
The US and the EU have been striving to convince the Saudis to increase oil output and provide some relief to the energy crisis and also to deprive Russia of its huge earnings from oil exports. OPEC however seems to have turned its back on the West. US President Joe Biden hasn’t ruled out drawing down from the strategic petroleum reserves to tame rising oil prices.
Oil prices are also supported by the recent escalation in the Ukraine crisis with a series of Russian missile attacks against Ukrainian cities. U.S. President Joe Biden spoke with Ukrainian President Volodymyr Zelensky on Monday condemning the latest attacks, while G-7 leaders vowed to help Ukraine for ‘as long as it takes.
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