Oil Retreats as China’s Covid Struggles Threaten Demand Outlook

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(Bloomberg) — Oil fell as China’s strict Covid Zero policy fanned concerns about energy demand, and investors turned away from risk assets amid a rout in cryptocurrencies that’s rattled broader markets.

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West Texas Intermediate sank toward $85 a barrel, after losing 3.5% on Wednesday as data showed US crude stockpiles hit the highest since July 2021. China’s anti-virus policies are hurting consumption, with the country now increasing curbs in the manufacturing powerhouse of Guangzhou. Futures have dropped every day this week, on course for the worst run since last year.

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The turmoil in digital currencies has aided the dollar as investors sought havens, with a gauge of the US currency rising 0.6% on Wednesday. That makes commodities priced in the greenback more expensive for overseas buyers. 

Crude has slumped by almost a third from its June highs as a global slowdown and tighter monetary policy threaten to sap energy demand. Still, futures have regained some ground this quarter after the Organization of Petroleum Exporting Countries and its allies agreed to reduce supply, and traders looked ahead to tighter European Union curbs on Russian flows.

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“Oil traders were wrong-footed after backing a China reopening,” said Stephen Innes, managing partner at SPI Asset Management. The worsening China outlook is “bringing the recessionary narrative back to the forefront.”

Oil market differentials have narrowed, signaling an easing of tightness. Brent’s prompt spread — the difference between its two nearest contracts — was $1.43 a barrel in backwardation, down from $1.83 a month ago.

Investors are also watching for critical US inflation data due later Thursday as the figures will provide clues on how much more the Federal Reserve will raise interest rates. Charles Evans, the outgoing president of the Federal Reserve Bank of Chicago, said it’s time for the central bank to begin slowing the blistering pace of increases given how high rates have already gone.

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