© Reuters. FILE PHOTO: Crude oil storage tanks are seen at Kinder Morgan Wharf in Sherwood Park near Edmonton, Alberta, Canada, on November 14, 2016.REUTERS/Chris Helgren
NEW YORK (Reuters) – Oil prices were little changed on Monday as the market balanced an expected drop in demand due to mass testing of COVID-19 in China with persistent concerns about tight supply.
Brent crude futures were down 33 cents, or 0.3%, at $106.69 a barrel by 12:43 p.m. ET (1643 GMT), while U.S. West Texas Intermediate (WTI) crude It was down 86 cents, or 0.8 percent, at $103.93.
Open interest in Nymex futures fell on July 7 to the lowest level since October 2015 as investors trimmed risk assets, amid expectations the Federal Reserve will continue to raise interest rates.
Last week, oil speculators cut their net-long futures and options positions on the COMEX and ICE to their lowest since April 2020.
“We still foresee possible recessions from time to time, prompting a massive liquidation in the oil space, and then a renewed focus on tight global oil supplies that haven’t seen any noticeable loosening,” analysts at Ritterbusch and Associates said in a note.
Markets were unsettled by news that China has discovered the first case of a highly transmissible sub-variant of Omicron in Shanghai, which could lead to another round of large-scale testing that will hurt fuel demand.
“The combined impact of concerns about a global economic slowdown and renewed Covid-19 outbreaks is the worst time for the oil market,” Investec Risk Solutions said in a note.
The dollar’s appreciation against a basket of other currencies to its highest level since October 2002 also weighed on oil. A stronger dollar reduces demand for oil by making fuel more expensive for buyers using other currencies.
Fighting inflation is a top priority now, despite slowing growth in the euro zone economy, euro zone finance ministers said, as they were informed of a worsening economic outlook from the European Commission.
Markets remain jittery over Western plans to cap Russian oil prices, with Russian President Vladimir Putin warning that further sanctions could lead to “catastrophic” consequences for global energy markets.
JPMorgan said the market was caught between fears of a possible halt in Russian supplies and a possible recession.
“Macro risks are becoming increasingly two-way. A 3 million barrels per day (bbl) cut in Russian oil exports is a credible threat that, if materialized, will push prices to around $190/bbl,” the bank said in a note indicated in.
“On the other hand, the impact of a sharp drop in demand growth in a recession scenario would see Brent prices average around $90/bbl in a mild recession and $78/bbl in a more severe recession scenario.”
Questions remain about how long it will take for crude oil to flow out of Kazakhstan through the Caspian Pipeline Consortium (CPC).
Supplies have continued so far from the pipeline, which transports about 1% of the world’s oil, and a Russian court overturned an earlier decision to suspend the pipeline.
Meanwhile, Brazilian President Jair Bolsonaro said he had reached an agreement with Moscow to buy cheaper diesel from Russia.