Oil: A New Week and a New $7 Drop as Dollar Flies Amid China Covid

© Reuters.

By Barani Krishnan

AiVIF.com -- The oil bears are getting more optimistic that a barrel beneath $90 might be possible after all.

Crude prices tumbled more than $8 a barrel by Tuesday afternoon, the second major loss in a week after the $10 drop seven days earlier, in a sign that oil may break new bearish ground since the post-Ukraine invasion rally that took it to between $130 and $140.

New York-traded West Texas Intermediate, or WTI, crude was down $8.16, or almost 8%, to $95.93 a barrel by 1:00 PM ET (17:00 GMT). The U.S. crude benchmark has lost nearly 10% since the start of July.

London-traded Brent crude was down $7.49, or almost 7%, to $99.61 a barrel. The global crude benchmark is down 8.5% since this month began.

“Seven percent down moves in a day is big,” John Kilduff, founding partner at New York energy hedge Again Capital said, referring to Tuesday’s action. “Will some of this get retraced? I have to believe that. But we have a nice downtrend. The two-day moving average is in the neighborhood of $88.”

WTI technical charts by skcharting.com suggested a deeper drop ahead if the current momentum held.

“WTI looks all set to visit 200-Day SMA of $93.90 and 50-Week EMA of $92.70,” the firm’s chief technical strategist Sunil Kumar Dixit said, referring respectively to the Simple Moving Average and the Exponential Moving Average.

“There may be a short-term rebound towards $102-$105-$108. But if intense sell-off pushes through the two support levels, doors may be open for the vertical support areas of $85 and $83."

Tuesday's run-down in oil came as the Dollar Index, which pits the U.S. currency against six other majors, hit new two-decades highs, reaching almost 109 points. A stronger dollar typically makes crude and all other commodities priced in the greenback costlier for those using other currencies.

In China, fresh curbs on social activity and business after new infections from the highly infectious BA.5.2.1 subvariant of the Omicron led to fears that authorities in the No. 2 economy might overreach again in their response to the pandemic. Beijing’s "zero-Covid" policy has been cited by many as causing more economic damage than good in health terms.

Reuters, meanwhile, reported that investors have been dumping petroleum-related derivatives at one of the fastest rates of the pandemic era as recession fears intensified. Hedge funds and other money managers sold the equivalent of 110 million barrels in the six most important petroleum-related futures and options contracts in the week to July 5

July’s tumble in oil also undermines OPEC’s optimistic global demand forecast for oil going into next year. The 13-member Saudi-led oil exporters group, expects average global oil demand to hit a record high of 103 million barrels daily in 2023. The forecast is based on the assumption that the war in Ukraine will not impact economic growth and China will overcome Covid restrictions.

The White House on Monday prodded OPEC, particularly the Saudis, to put out even more oil, saying it believed the oil exporters group had the capacity to do so.

“We do believe there is a capacity for further steps that could be taken,” White House National Security Advisor Jake Sullivan said days before U.S. President Joe Biden was set to visit the Middle East, where he will hold talks with leaders of the top OPEC oil producers.