Oil prices dropped on Monday to end a five-day winning streak, as investors took profits after a weak reading in China’s services activity has once again raised concerns over declining worldwide demand for fuel.
Global benchmark Brent crude futures lost 0.7% to $97.22 per barrel, having earlier shed as much as 1.1%. The US West Texas Intermediate (WTI) crude futures tumbled 0.7% to $91.92 per barrel after also falling 1.1% earlier in the session.
A Triple Whammy on Oil
Analyst Stephen Innes said oil is being hit by China’s economic weakness, the US’s tight monetary policy, and President Joe Biden’s Strategic Petroleum Reserve (SPR) intervention.
Data from a private-sector business survey showed that China’s services activity in September contracted for the first time since May, as the country’s COVID-19 restrictions further weighed on the already faltering demand and weakened business confidence.
The Caixin Services Purchasing Managers’ Index (PMI) was down 49.3 in the previous month from 55.0 in August, with pandemic-related curbs hitting supply and demand and hindering travel within the country.
Official data released last week also showed sluggish services activity in China, although it was slightly above the critical 50-point target that separates growth from contraction from month to month.
Being the world’s second-largest oil consumer, the underperformance of China’s economy increases fears over a potential recession driven by several interest rate hikes from central banks that look to ease surging inflation rates.
Meanwhile, more releases from the US SPR may occur in November, following the Organization of the Petroleum Exporting Countries (OPEC) and allies’ (OPEC+) decision in the previous week to reduce their production target by 2 million barrels per day, the largest supply cut since 2020.
The announcement led Brent and WTI to their biggest weekly percentage gains since March.
The cut also came ahead of a European Union (EU) embargo on Russian oil and is expected to tighten supply in an already constricted market. EU sanctions on Russian crude and oil products are set to be implemented in December and February, respectively.
Analysts saw the OPEC+ cuts as bullish, but market uncertainties, including how Russian oil supply evolves due to EU oil restrictions and G7’s price cap and future demand considering the gloomy macro picture, to keep an eye on.
