Oil Falls Nearly $3 To Below $104 A Barrel On Demand And Economic Growth Worries

Crude oil prices fell over 2.5 per cent to below $104 per barrel early on Monday on demand worries driven by the COVID-led extended restrictions in China and global economic growth concerns as central banks look poised to tighten policy aggressively.

The international benchmark, Brent crude, fell nearly $3, or 2.73 per cent, to $103.7 per barrel after dropping 1.5 per cent on Friday and 4.5 per cent last week. 

Global oil markets have gone through wild gyrations since Russia invaded Ukraine on February 24, with Brent and US futures trading above $100. 

Still, benchmark crude prices have weakened in recent trading weeks on demand concerns driven by the renewed surge in COVID-19 cases in China and the following strict restriction imposed there.

If the weakening trend continues, April will be this year's first month in the negative for Brent. However, the bias is still tilted to the upside on supply disruptions because of Western sanctions on Russia for its attack on Ukraine. 

While demand worries from one of the world's largest consumer of oil, China, has weighed on investors' sentiment, the path of least resistance for crude oil is up, driven by the prospect of more sanctions on Moscow as the Ukraine crisis intensifies further.

"The risks are certainly more tilted to the upside, given the war in Ukraine and a potential embargo on Russian exports, but lockdowns in China and the risk of a Fed-driven economic slowdown are also significant," Craig Erlam, head of research for Europe at online trading platform OANDA, told ANI.

In recent weeks, the dollar's surge has also weighed on oil prices, led by the aggressive posturing by Federal Reserve policymakers for more significant and faster rate hikes to fight runaway inflation.

The dollar index, which measures the greenback's performance against six of its peers, was trading at 101.08 on Monday morning, just shy of a two-year peak of 101.33 hit on Friday.

Among major currencies, the Japanese yen has been the most affected by rising US rates, with Japan keeping its benchmark yields pinned down. On Monday morning, the dollar was slightly firmer on the yen at 128.63. The dollar has gained 11% on the yen so far this year. Last week's 129.4 was the highest for dollar-yen in 20 years.

Fed policymakers have hinted at a 50 basis points hike at the May meeting. One official even suggests a 75 basis points hike at the May meeting after the central bank lifted rates by 25 basis points at its previous meeting.

While those rate hikes themselves do not directly threaten crude markets, the expected global economic slowdown following the tightening weighs on investor sentiment.

"Some fear that a 50 basis point rate increase will be the first of many and could slow down the economy and the oil demand," wrote Phil Flynn, energy analyst at Price Futures Group in Chicago, in a commentary note.

"It is not just a tightening cycle upsetting traders overnight but also the pricing-in of a 50-basis point interest rate increase by September by the European Central Bank. The Bank of Japan, on the other hand, wants to remain dovish but worries that the course of the US and Europe could force them to change course," he added.