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Oil Heads for Weekly Losses on China COVID Woes, U.S. Supply Glut

Published 2022-10-13, 10:16 p/m
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By Ambar Warrick 

Investing.com-- Oil prices rose slightly on Friday but were set to end the week lower as a spike in Chinese COVID cases drove concerns over slowing demand, while the U.S. logged a bigger-than-expected build in crude inventories. 

Crude prices bounced unexpectedly on Thursday despite data showing a bigger-than-expected rise in U.S. inflation, as markets bet that price pressures in the country had peaked this year. 

But the outlook for crude remains constrained, especially with the threat of new COVID lockdowns in major importer China, which could severely crimp demand. Shanghai, the country’s financial capital, has already introduced some restrictions. 

Focus is now on the 20th National Congress of the Chinese Communist Party this Sunday, for any cues on stimulus measures and an update to the COVID Zero policy. Fears of slowing Chinese demand have weighed heavily on oil prices this year.

London-traded Brent Oil Futures rose 0.1% to $94.79 a barrel, while U.S. West Texas Intermediate Crude Futures rose 0.2% to $89.31 a barrel by 21:56 ET (01:56 GMT). Both contracts were set to lose nearly 4% this week.

Further weighing on prices this week, data showed U.S. crude inventories rose by a bigger-than-expected 9.88 million barrels in the week to Oct 7. But a bulk of this rise was driven by an unprecedented 7.7-million-barrel draw down from the Strategic Petroleum Reserve (SPR) by the Biden government.

The drawdown comes as a response to a major supply cut by the Organization of Petroleum Exporting Countries and Allies (OPEC+) earlier this month. Washington had criticized the cut, and threatened to release more crude from the SPR in response. 

The move is likely to cause a supply glut in markets and offset any bigger price gains from the supply cut. It was also intended to bring down U.S. gasoline prices ahead of the midterm elections in November, a sticking point for voters. 

Analysts now expect further volatility in crude markets, with prices caught between tightening production and increased U.S. supply. 

Rising U.S. interest rates, following hotter-than-expected inflation in September, are also expected to weigh on economic activity, which could dent crude demand. Strength in the dollar also makes crude more expensive for importers.

On the other hand, production disruptions in Russia due to the Ukraine war could further tighten supply. Demand for heating oil, in the event of a harsh European winter, could also support prices.  

 

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