Oil prices record biggest weekly drop since March as demand glooms

October 09, 2023 (MLN): International oil prices closed the first week of October on a sour note, witnessing their steepest weekly decline since March 2023, amid rising U.S. bond yields and darkening signs regarding demand.

The major benchmarks, Brent Crude, and WTI ended the week at $83.05 and $81.63, respectively, experiencing declines of 8.71% and 9.11%.

This marks the third consecutive week of losses attributed to the major central bank's outlook to keep interest rates up for an extended duration.

There exists an inverse relationship between oil prices and interest rates, as in an environment of rising interest rates economic activity shrinks and oil demand dampens.

The sentiment for higher interest rates resulted in a  surge in U.S. Treasury yields, subsequently strengthening the dollar.

The US dollar index (DXY), which tracks the value of the greenback against six other major currencies concluded its eleven-week upward trajectory with a slight decline of 0.07% but remained near 11-month highs.

Theoretically, a stronger dollar makes oil more expensive for other currency holders and tends to reduce demand.

In addition to this, analysts’ fraternity is of the view that traders began locking in their profits as crude prices nearly reached 10-month highs in the third quarter, further adding to the pressure.

Investors’ worries were also fueled by the major drop in the finished motor gasoline supplied to about 8 million bpd, its lowest since the start of this year, according to the U.S. Energy Information Administration (EIA).

It is crucial to note that in September, Brent and WTI experienced gains of 5.93% and 7.96% MoM to close their highest level since November last year.

These gains were associated with rising supply concerns as OPEC+ announced to extend supply cuts until the end of the year.

With the robust performance of September, the commodity notched up four straight months in a bullish zone.

The OPEC+ in its meeting held on Wednesday announced to make no changes to the group’s output policy. Additionally, both Saudi Arabia and Russia also stuck to their decision to cumulatively reduce oil production by 1.3 million barrels per day (bpd) till the year-end.

Despite rising concerns over a tightening global supply, the market remained worried over the demand outlook with rising interest rates.

The latest data released by the U.S. Bureau of Labor Statistics showed that the U.S. non-farm payrolls (NFP) added 336,000 jobs in September, far exceeding analysts' expectations of just 170,000 jobs.

The market sentiment for the news flow was mixed. On one hand, it indicated a growth in the US economy, which tends to drive oil demand in the short term. However, it also raised predictions of another rate hike.

Outlook

According to Citigroup's latest predictions, Brent Crude is expected to drop to $70 a barrel by 2024 as the global market is expected to swing to surplus by next year.

However, in a dramatic turn of events amid the ongoing Israel-Palestine conflict, oil prices are expected to get a significant boost, following historic trends and patterns.

To note, oil prices saw an increase of almost 40%, after Russia's president Vladimir Putin declared a military invasion on Ukraine in his address to the nation on February 24, 2022. 

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