Oil suffers a fresh blow as demand worries about an extension of the weekly decline

(Bloomberg) — Oil is headed for consecutive weekly losses, weighed down by worries about demand, rising inventories and the possibility that the Biden administration will make another drawdown from emergency reserves.

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West Texas Intermediate rose to $84 a barrel, but is still down nearly 4% this week after hitting its lowest level since January. There is concern that consumption will take a hit as central banks raise interest rates and China sticks to its Covid Zero strategy. The dollar’s record rally was also counterintuitive.

Despite the current period of market weakness, U.S. officials are looking for ways to prevent a sharp rise in oil prices later this year, including the possibility of additional releases from strategic crude stockpiles. Officials are warning of a possible rise in prices in December, when EU sanctions on Russian energy supplies take effect, unless other measures are taken.

Crude has fallen by nearly a third from June highs as worries about a global slowdown have eased, reversing a rally sparked by Moscow’s invasion of Ukraine. On Thursday, Federal Reserve Chairman Jerome Powell said the U.S. central bank was determined to limit price pressures, while the European Central Bank made a splash in raising interest rates, even as the region risks slipping into recession amid worsening of the energy crisis.

The European Union crisis — driven by gas supply cuts from Russia and further crude cuts from the EU — will be front and center on Friday as energy ministers gather in Brussels. They will seek measures to alleviate the damage caused by the confrontation with Moscow. Earlier this week, President Vladimir Putin threatened to cut off energy supplies to nations that support a price cap plan.

Crude’s fall this week poses a challenge for the Organization of the Petroleum Exporting Countries and its allies after they announced a cut in nominal output earlier in the week, sparking a short-lived rally. The cut surprised many traders, who had expected OPEC+ to be unchanged.

“While oil markets face negative sentiment in the short term, expectations of OPEC+ output cuts could support the price,” said Charu Chanana, market strategist at Saxo Markets Singapore Pte. The group of producers “indicated earlier this week an intention to keep crude oil prices around $100,” he said.

On Thursday, US government data showed a large build-up in crude inventories, which rose by a more than expected 8.8 million barrels. At the same time, a gasoline demand index dipped below 2020 seasonal levels.

Widely watched timeframes have narrowed, signaling an easing of market tightness. The Brent spot spread — the difference between its two closest contracts — was at 98 cents a barrel in retreat, down from $1.21 a barrel last Friday and nearly $2 two weeks ago.

This week’s MLIV Pulse research focuses on energy and commodities. It’s short and anonymous. Click here to share your views.

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