Oil prices rose as much as nearly 3 per cent on Wednesday before paring some gains as investors piled back into the market after a heavy rout in the previous session, with supply concerns returning to the fore even as worries about a global recession linger.
Brent crude futures rose as much as $3.08, or 2.9 per cent, to $105.85 a barrel in early trade after plunging 9.5 per cent on Tuesday, the biggest daily drop since March. It was last up $1.63, or 1.6 per cent, at $104.40 a barrel at 0650 GMT.
US West Texas Intermediate (WTI) crude climbed to a session high of $102.14 a barrel, up $2.64, or 2.7 per cent, after closing below $100 for the first time since late April. It briefly dipped into negative territory amid a stronger US dollar before resuming gains and was last up $1.20, or 1.2 per cent, at $100.70 a barrel.
The dollar strengthened to a 20-year peak against the euro and multi-month highs against other major peers as higher gas prices and political uncertainty renewed recession fears, sending investors scrambling to the safe-haven currency.
A stronger greenback usually makes oil more expensive in other currencies, which could curb demand.
“Today is sort of a reset. No doubt there is short covering and bargain hunters are coming in,” said John Kilduff, partner at Again Capital LLC.
“The fundamental story regarding global tightness is still there … The sell-off was definitely overdone,” he added.
Meanwhile, Russia’s former president Dmitry Medvedev warned that a reported proposal from Japan to cap the price of Russian oil at around half its current level would lead to significantly less oil in the market and push prices above $300-$400 a barrel.
On the other hand, the Norwegian government on Tuesday intervened to end a strike in the petroleum sector that had cut oil and gas output, a union leader and the labour ministry said, ending a stalemate that could have worsened Europe’s energy crunch.
By Saturday, the strike would have cut daily gas exports by 1,117,000 barrels of oil equivalent (boe), or 56 per cent of daily gas exports, while 341,000 of barrels of oil would have been lost, the Norwegian Oil and Gas (NOG) employers’ lobby said.
Worries about a recession, however, have continued to weigh on markets. By some early estimates, the world’s largest economy may have shrunk in the three months from April through June. That would be the second straight quarter of contraction, considered the definition of a technical recession.
More G10 central banks raised interest rates in June than in any month for at least two decades, Reuters calculations showed. With inflation at multi-decade highs, the pace of policy-tightening is not expected to let up in the second half of 2022.
“Although crude oil still faces the problem of a supply shortage, key factors that led to the sharp selloff in oil yesterday remain,” said Leon Li, a Shanghai-based analyst at CMC Markets. He cited policy tightening by global central banks and a likely interest rate hike by the US Federal Reserve as pressuring commodities prices.
“Thus, today’s rebound could be a short-term correction for bears and oil prices are likely to remain under pressure in the near future.”
Renewed concerns of COVID-19 lockdowns across China could also cap oil price gains.
The world’s largest crude importer is fighting COVID flare-ups across the country with mass testing and new restrictions. China has reported coronavirus cases in the cities of Shanghai, Beijing, eastern Anhui and Jiangsu provinces, and the northwestern city of Xian.