Oil prices slide as Covid curbs in China, possible rate hikes weigh on demand outlook

Oil prices slide as Covid curbs in China, possible rate hikes weigh on demand outlook
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SINGAPORE (Sept 12): Oil prices slipped during Asian trade on Monday (Sept 12), as the prospect of further interest rate hikes in the US and Europe to quell inflation and the imposition of strict Covid-19 restrictions in China overshadowed the global demand outlook.

Brent crude futures had dropped 78 cents, or 0.9%, to US$86.01 a barrel by 0040 GMT, after settling 4.1% higher last Friday. US West Texas Intermediate crude was at US$92.11 a barrel, down 73 cents, or 0.8%, after a 3.9% gain in the previous session.

Prices were little changed last week, as gains from a nominal supply cut by the Organization of the Petroleum Exporting Countries (Opec) and allies including Russia, a group known as Opec+, were offset by ongoing lockdowns in China, the world's top crude importer.

China's oil demand could contract for the first time in two decades this year, as Beijing's zero-Covid policy keeps people at home during holidays, and reduces fuel consumption.

"Demand concerns centred on the impact of rising interest rates to combat inflation and China's zero-Covid policy," Commonwealth Bank of Australia analyst Vivek Dhar wrote in a note.

The European Central Bank and the US Federal Reserve are prepared to increase interest rates further to tackle inflation, which could lift the value of the US dollar against currencies, and make dollar-denominated oil more expensive for investors.

Still, global oil prices may rebound towards year end — supply is expected to tighten further when a European Union embargo on Russian oil take effect on Dec 5.

The Group of Seven will implement a price cap on Russian oil to limit Russia's lucrative oil export revenue, following its invasion of Ukraine in February, and plans to take measures to ensure that the oil could still flow to emerging nations. Moscow calls its actions in Ukraine "a special operation".