Oil loses ground as demand worries cancel out supply fears

Tokyo/Singapore — Oil prices extended losses in early trade on Wednesday as worry about global demand due to weak economic momentum in China and a likely rise in US commercial stockpiles outweighed supply fear from heightened tension in the Middle East.

Brent futures for June slipped 56c, or 0.62%, to $89.46 a barrel by 3.37am GMT, while US crude futures for May fell 63c, or 0.74%, to $84.73 a barrel.

Oil prices have softened so far this week as economic headwinds pressured investor sentiment, curbing gains from geopolitical tension, with eyes on how Israel might respond to Iran’s attack at the weekend.

“With oil prices highly sensitive to geopolitical risks, the past week has seen some wait-and-see consolidation in place as Israel’s response will determine if there may be a wider regional conflict, which could significantly impact oil supplies,” said IG market strategist Yeap Jun Rong.

“For now, the near-term weakness in oil prices may reflect some expectations that tensions may still be contained and that other key oil producer such as Saudi Arabia may jump in to mitigate any global supply shock,” Yeap said.

In China, the world’s biggest oil importer, the economy grew faster than expected in the first quarter, but several March indicators, including property investment, retail sales and industrial output, showed that demand at home remains frail, weighing on overall momentum.

“Apart from that, a build-up in US crude inventories overnight and a mixed set of economic data out of China also offered some reservations, alongside near-term overbought technicals which prompts some profit-taking,” Yeap said.

US crude oil inventories rose last week more than expected by analysts polled by Reuters, according to market sources citing American Petroleum Institute figures on Tuesday. Official data from the Energy Information Administration, the statistical arm of the US department of energy, is due on Wednesday at 2.30pm GMT.

In the Middle East, a third meeting of Israel’s war cabinet set for Tuesday to decide on a response to Iran’s first-ever direct attack was put off until Wednesday, as Western allies eyed swift new sanctions against Tehran to help dissuade Israel from a major escalation.

Analysts, however, do not expect Iran’s unprecedented missile and drone strike on Israel to prompt dramatic sanctions action on Iran’s oil exports from the Biden administration due to worries about boosting oil prices and angering top buyer China.

“Sanctions are already in place, the issue is that they have not been strictly enforced for the last couple of years. And the big question is whether they will be enforced more rigorously now,” said ING analysts in a client note.

Reuters