Oil holds losses as economic slowdown concerns hang over market

Oil held losses before interest-rate decisions by major central banks, as concerns over a global economic slowdown linger.

West Texas Intermediate futures traded near $86 a barrel after losing around 3% over the previous two sessions. The Federal Reserve is scheduled to make a decision on rates on Wednesday, as central banks continue to tighten monetary policy to tame inflation. Meanwhile, the chief executive officer of top trader Vitol Group said oil demand had started to fall due to high prices.

A strong US dollar has added to bearish headwinds, making commodities priced in the currency less attractive to investors. The Bloomberg Dollar Spot Index has rebounded recently after dipping late last month.

While oil has shed almost a third of its value since early June, futures capped the first monthly gain since May last month after the OPEC+ alliance agreed to sizable production cuts. Excess supply was the main reason to curb output from November, the group’s Secretary-General Haitham al Ghais said on Monday.

“If interest rates are going to move higher, then there’s greater chance of a recession, and OPEC would be right to worry that it’ll lead to further demand destruction,” said Vishnu Varathan, the Asia head of economics and strategy at Mizuho Bank Ltd. “That said, OPEC’s bias is to keep supply tight, as high prices are an economic windfall that they’re likely unwilling to give up.”

Cuts by the Organization of Petroleum Exporting Countries and its allies will be followed by European Union sanctions on Russian crude flows, further clouding the supply outlook. Moscow has mostly failed to line up fresh markets for its oil that it needs to secure before EU penalties take effect from December 5.

A US-led plan to cap the price of Russian oil sales, part of the broader international response to the invasion of Ukraine, will temporarily exempt shipments loaded before December 5, according to the US Treasury Department. Cargoes must be unloaded by January 19 to qualify for exemption.