Oil dips as economic uncertainty outweighs China optimism

crude oil

Oil retreated on Tuesday after two sessions of gains as uncertainty about the global economic outlook and a firmer dollar countered investor optimism about demand in China and expectations of a drop in U.S. crude inventories.

The dollar rose as worries about corporate earnings and the global economic outlook deepened. A stronger dollar makes oil more expensive for buyers holding other currencies and tends to reflect reduced risk appetite among investors.

"A recovering dollar is weighing on sentiment," said Stephen Brennock of oil broker PVM. "I suspect that upcoming macro releases concerning U.S. house prices and consumer confidence are also keeping buyers on the sidelines."

Brent crude fell by $1.00, or 1.2%, to $81.73 a barrel by 1335 GMT while U.S. West Texas Intermediate crude dropped 77 cents to $77.99. Both contracts rose by more than 1% on Monday.

"The general level of risk appetite has turned increasingly sour again today, with losses seen across most commodity markets," said Saxo Bank commodity strategist Ole Hansen.

Oil rose earlier in the day, supported by investor optimism that holiday travel in China would boost fuel demand and by expectations of a drop in U.S. crude inventories.

Involuntary and planned supply cuts also lent support. Iraq's northern oil exports have shown little sign of an imminent restart after a month-long standstill. Members of the OPEC+ producer group, meanwhile, are preparing for the start of voluntary cuts in May.

Still, investors remain wary about central banks in the United States, Britain and the European Union potentially raising interest rates further to curb inflation, which could slow economic growth and dent energy demand.

The U.S. Federal Reserve, the Bank of England and the European Central Bank are all expected to raise rates at their coming meetings. The Fed meets over May 2-3.

Traders were awaiting U.S. stockpiles data from the American Petroleum Institute on Tuesday. Analysts expect crude inventories to fall by about 1.7 million barrels.