Oil slips as recession fears outweigh tight supply prospects

• Fed’s Evans: close alignment on rate hikes.
• Dollar up ahead of inflation data this week.
• Aramco to keep full supplies to Asia in Nov despite OPEC+ cuts.

NEW YORK: Oil prices edged lower on Monday as investors weighed economic storm clouds that could foreshadow a global recession, and erode fuel demand, against potentially tighter supply.

Brent crude futures fell 69 cents, or 0.7%, to $97.23 a barrel by 1:11 p.m. EDT (1711 GMT). West Texas Intermediate crude declined by 36 cents, or 0.4%, to $92.57 a barrel.

U.S. Federal Reserve Chicago President Charles Evans said there was a strong consensus at the Fed to raise the target policy rate to around 4.5% by March and hold it there. 

Stubbornly higher rates, which are aimed at giving the US central bank time to evaluate the impact of inflation and allow clogged supply chains to clear, limited oil prices.

“There’s more of the doom and gloom from those folks and what they’re going to do to the economy, because they’re not so convinced they have inflation under control, and that’s the macro play that’s weighing on oil,” said John Kilduff, partner at Again Capital LLC in New York.

Oil prices also struggled under a strengthening US dollar, which rose for a fourth session. A stronger dollar makes crude more expensive for non-American buyers.

The prospect of tightening OPEC+ oil supplies limited declines in prices. But signs that the group’s de facto leader, Saudi Arabia, would continue to serve Asian customers at full levels lowered expectations of the cuts’ impact. 

Saudi Aramco has told at least seven customers in Asia they will receive full contract volumes of crude oil in November ahead of the peak winter season, several sources with knowledge of the matter said.

The Organization of the Petroleum Exporting Countries and allies including Russia, together known as OPEC+, decided last week to lower their output target by 2 million barrels per day.

Brent and WTI posted their biggest weekly percentage gains since March after the reduction was announced.

However, the cut has spurred a flurry of activity in the options market – but with more U.S. bettors opting for a bearish stance, data from CME Group showed.

Concerns over still relatively robust demand as the pandemic has eased meeting potentially scarce supply have been deepened as the European Union late last week endorsed a G7 plan to impose a price cap on Russian oil exports. 

The complicated new sanctions package could end up shutting in considerable supplies of Russian crude, analysts have warned.

“A recessionary economic outlook will lead to lower oil demand,” Fitch Ratings said on Monday. “However, we expect pricing volatility to remain high in the short term as geopolitical factors, such as further sanctions leading to a reduction in Russian exports.”

Those political factors could alter supply patterns and cause greater price volatility, Fitch said.

Meanwhile, services activity in China during September contracted for the first time in four months as COVID-19 restrictions hit demand and business confidence, data showed on Saturday. 

The slowdown in China, the world’s second-largest oil consumer behind the United States, adds to growing concerns over a possible global recession triggered by numerous central banks raising interest rates to combat high inflation.