By Peter Nurse
Investing.com -- Oil prices weakened sharply Tuesday, weighed by further COVID curbs in China - the world’s largest importer of crude, a stronger dollar, and concerns about a global economic slowdown.
By 09:30 AM ET (1330 GMT), U.S. crude futures traded 4.8% lower at $99.06 a barrel, while the Brent contract fell 4.5% to $102.27.
U.S. Gasoline RBOB Futures were down 4.6% at $3.3028 a gallon.
Multiple Chinese cities are now adopting fresh COVID-19 curbs, from business shutdowns to broader lockdowns in an effort to rein in new infections from the highly infectious BA.5.2.1 subvariant of the virus.
Authorities in Shanghai identified this new sub-variant of the now-dominant BA.5 Omicron strain over the weekend, and the speed it appears to have traveled is causing concerns.
“The Chinese government has opted for a zero COVID-19 policy in the past, meaning extreme lockdowns, testings, quarantines, etc,” said Michalis Efthymiou, an analyst at NAGA. “As China is the largest oil importer, investors fear further lockdowns will result in significantly lower demand.”
Adding to the weak sentiment in the crude market is the strength of the U.S. dollar, with the euro trading at parity against the greenback – according to some trading systems - for the first time in 20 years.
A stronger U.S. currency usually weighs on oil because it makes the dollar-priced commodity more expensive for holders of other currencies.
Still, despite these factors, and worries that aggressive tightening by the U.S. Federal Reserve, in particular, will lead to a global recession, the Organization of Petroleum Exporting Countries sees no real relief for consumers into 2023.
The cartel expects global oil demand growth to exceed the increase in supplies by 1 million barrels a day next year, in its latest monthly report. The group predicted that global demand will expand by 2.7 million barrels a day next year, bolstered by growth in emerging economies, while supplies outside OPEC will increase by 1.7 million a day.
To fill the gap, OPEC would need to significantly hike production, but members are already falling far behind the volumes needed right now due to underinvestment and political instability.
U.S. President Joe Biden is set to travel to Saudi Arabia later this week to try and negotiate an increase in oil production from the main player in the cartel, and one of the very few that still have excess capacity.
However, very little is expected to result from the meeting, and this suggests the global squeeze on energy supply could get worse.
“The world has never witnessed such a major energy crisis in terms of its depth and its complexity,” International Energy Agency Executive Director Fatih Birol said Tuesday. “We might not have seen the worst of it yet -- this is affecting the entire world.”
Later in the session, the American Petroleum Institute offers up its estimate of weekly U.S. crude supply.