Oil Heads for Weekly Loss as Growth Fears Trump Supply Tightness

(Bloomberg) -- Oil is set for a weekly loss after choppy trading in which concerns over a demand-sapping slump clashed with signals of tight supply.

West Texas Intermediate was below $103 a barrel, putting the US benchmark on course for a weekly fall of more than 5%. Prices have swung in a range of more than $16 this week, which saw both WTI and Brent briefly drop below $100. 

Investors remain concerned that restrictive US monetary policy could herald a recession, and oil has been dragged lower alongside other commodities. Two of the Federal Reserve’s most hawkish policy makers, Christopher Waller and James Bullard, backed raising interest rates by another 75 basis points this month to curb red-hot inflation, while also playing down concerns of a slump. 

Still, physical signals remain robust, especially in the US. In addition, there may be interruptions to supplies. A key export route for Kazakh oil risks being suspended as it appeals a Russian court order for it to temporarily shut down.

Crude’s volatile trading means that it’s well down from last month’s high but still up more than 35% this year following Russia’s invasion of Ukraine. The complex market outlook has spurred banks to offer starkly different scenarios for prices, with Goldman Sachs Group Inc. remaining broadly bullish while Citigroup Inc. has said the commodity is at risk of a significant tumble.

Given the recent “rout, the financial oil market is dislocating dramatically from an extremely tight spot physical market,” RBC Capital Markets analysts including Helima Croft and Michael Tran said in note. “The physical market is pricing in scarcity, while the financial market is pricing in recession.”

In a sign of tightness, oil markets remain in backwardation, a bullish pattern marked by near-term prices trading above longer-term ones. Brent’s prompt spread -- the difference between its two nearest contracts -- was $3.69 a barrel in backwardation, up from $2.69 a barrel a month ago.

In China, meanwhile, investors are tracking efforts by Beijing to buttress growth after anti-virus lockdowns hurt the economy and energy consumption in the first half. The Ministry of Finance may allow local governments to sell 1.5 trillion yuan ($220 billion) of special bonds for infrastructure funding.