Oil falls more than 2% on recession and China COVID fears

Oil slid more than 2% on Tuesday, extending losses of nearly 2% in the previous session, as recession fears and a flare-up in COVID-19 cases in China raised concern over global demand.

World Bank President David Malpass and International Monetary Fund Managing Director Kristalina Georgieva warned on Monday of a growing risk of global recession and said that inflation remains a continuing problem.

Brent crude fell US$2.30, or 2.4%, to US$93.89 a barrel by 1006 GMT. U.S. West Texas Intermediate crude dropped US$2.12, or 2.3%, to US$89.01.

“There is growing pessimism in the markets now,” said Craig Erlam of brokerage OANDA.

Oil has dropped sharply on economic fears after surging earlier in 2022, when Brent came close to its record high of US$147 as Russia’s invasion of Ukraine added to supply concerns.

“Warnings after warnings are being issued when it comes to global economic growth,” said Avatrade analyst Naeem Aslam.

Those worries aside, fears of a further hit to demand in China also weighed. Authorities have stepped up coronavirus testing in Shanghai and other large cities as COVID-19 infections rise again.

Oil also came under pressure from a strong dollar, which hit multi-year highs on worries about increases to interest rates and escalation of the Ukraine war.

A strong dollar makes oil more expensive for buyers with other currencies and tends to weigh on risk appetite.

Losses were limited, however, by a tight market and last week’s decision by the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, together known as OPEC+, to lower their output target by 2 million barrels per day.

“An undersupply is even looming next year because the production cut is supposed to apply until the end of 2023, according to the OPEC+ decision,” a Commerzbank report said.