Oil holds drop as China’s Covid struggles crimp demand outlook

Oil held a drop as China’s Covid Zero policy fanned concerns about energy demand in the largest crude importer, with lockdowns spreading.

West Texas Intermediate traded below $86 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 adding curbs in the southern manufacturing hub of Guangzhou.

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 Organisation of Petroleum Exporting Countries and its allies agreed to reduce supply, and traders looked ahead to tighter European Union curbs on Russian flows.

“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 $1.44 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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