Oil Prices Mixed as Markets Weigh China Risks, Supply Disruptions

By Ambar Warrick

Investing.com-- Oil prices saw choppy trade on Thursday as investors gauged potential headwinds from COVID disruptions in China, although a supply crunch in the United States and demand for heating oil in Europe pointed to some upside in the near-term.

London-traded Brent oil futures fell 0.1% to $93.96 a barrel, while U.S. West Texas Intermediate futures were nearly unchanged at $88.48 a barrel by 22:47 ET (02:47 GMT). Both contracts settled 1.6% and 2% higher, respectively, on Wednesday.

Traders bought into crude on the prospect that Europe would turn to heating oil in the winter months due to an acute natural gas shortage, which would boost oil prices. The International Energy Agency flagged the possibility of such a trend in the coming months.

The U.S. also logged a smaller build in crude inventories for the week to Sept. 9 when compared to the past week, with a major drawdown from the Strategic Petroleum Reserve (SPR) contributing largely to the build.

The White House has been drawing heavily from the SPR this year to bring down gasoline prices from record highs, leaving the reserve at its lowest level in 38 years. Oil prices are expected to rise as the country begins buying crude to refill the reserve later this year.

Potential disruptions in U.S. crude supply, stemming from a rail stoppage, are also expected to support prices in the near-term.

But on the other hand, markets feared that rising interest rates in the U.S. would trigger a recession, which in turn could severely crimp oil demand. Strength in the dollar, stemming from higher rates, also makes crude expensive for several Asian importers, which in turn dents demand.

Slowing crude demand in China, the world’s largest crude importer, is also expected to weigh on prices. A series of COVID lockdowns in the country this year have nearly ground economic activity to a halt.

With Beijing introducing new lockdown measures as recently as last week, the IEA also warned that demand in the country is likely to deteriorate further.

Oil prices have plummeted from highs hit earlier this year, as rising interest rates and growing fears of an economic recession dented the outlook for demand.

With inflation levels remaining elevated across most of the globe, and with interest rates set to rise even further, these concerns are expected to persist.