Oil prices fell more than 3 percent in late trading Monday (Tuesday morning WIB), following lower US stock markets, after US services sector data raised concerns that the Federal Reserve could continue its aggressive policy tightening path.
Brent crude futures for delivery in February slid $2.89, or 3.4 percent, to settle at $82.68 a barrel.
The price of West Texas Intermediate (WTI) crude for delivery in January slumped by $3.05, or 3.8 percent, to close at $76.93 a barrel.
Both benchmarks initially rose by more than two dollars before reversing.
During the session, the WTI front-month contract started trading lower than the half-year price, a market structure called a “contango,” which implies oversupply.
US service industry activity unexpectedly picked up in November, with employment recovering, offering more evidence of the economy’s underlying momentum as it prepares for an anticipated recession next year.
The news caused the oil and stock markets to reduce their gains.
The data defied expectations that the Fed could slow the pace and intensity of rate hikes amid recent signs of ebbing inflation.
“Macroeconomic jitters about the Fed and what they are going to do with rates are taking over the market,” said Price Futures Group Analyst Phil Flynn.
Supporting earlier markets, the Organization of the Petroleum Exporting Countries and allies, including Russia, collectively called OPEC+, agreed on Sunday, April 12, 2022, to stick to their October plan to cut production by 2 million barrels per day (bpd) from November to 2023.
“That decision… is not surprising, given the uncertainty in the market over the impact of the EU ban on imports of Russian crude from December 5 and the G7 price caps,” said Ann-Louise Hittle, vice president of consultancy Wood Mackenzie.
“In addition, the producer group faces downside risks from the potential weakening of global economic growth and China’s zero COVID policy.” The Group of Seven (G7) countries and Australia last week agreed on a price cap of US$60 per barrel for seaborne Russian oil.
But the effect of price caps on futures markets during Monday’s session (5/12/2022) ran out of steam by the end of the day, said Andrew Lipow, President of Lipow Oil Associates, in Houston.
“The market has realised that the European Union has banned purchases of Russian oil with some limited exceptions, and China and India will go ahead and buy Russian crude, so the impact of the price cap will be reduced,” Lipow said.
At the same time, in a positive sign for fuel demand in the world’s top oil importer, more Chinese cities relaxed COVID restrictions over the weekend.
Business and manufacturing activity in China, the world’s second-largest economy, has been hit this year by stringent measures to curb the spread of the coronavirus.
