Oil Posts Longest Monthly Slump Since 2020 Amid Growth Concerns

(Bloomberg) -- Oil registered its third straight monthly decline, its longest losing run in more than two years, on concern that tighter monetary policy and China's economic slowdown will impact crude demand. 

West Texas Intermediate lost more than 9% in August, the largest monthly decline since November. Bearish sentiment is mounting amid slowing economic growth for major oil consumer China. Also, central bank officials reaffirmed their commitment to raising interest rates to cool rapid inflation. The US oil benchmark settled Wednesday below $90 a barrel for the first time in two weeks. 

“This morning's price weakness is a summation of overall sentiment for the month of August, in which rising central bank interest rates are seen as the brake pedals to oil demand growth,” said Harry Altham, an energy analyst for StoneX Group.

Low liquidity has exacerbated crude's steep price swings, frustrating oil bulls including hedge fund manager Pierre Andurand, who opined Thursday that the futures market is “broken.” In the past week, oil has traded in a range of close to $10 a barrel. 

The decline in futures comes even as the US supply picture has turned bullish, with crude stockpiles dropping for a third week while inventories at the largest storage hub fell for the first time in over two months, according to the latest Energy Information Administration report. 

While there has been significant unrest in both Libya and Iraq in recent days, oil output in both OPEC members appears to be unaffected so far. Separately, talks to revive an Iranian nuclear deal that may unlock greater crude exports have dragged on, and Russian output has been maintained at levels higher than prior expectations.

An agreement to revive the 2015 nuclear deal is “not out of reach” if the text of the final accord is stronger with better guarantees for Iran, Iranian Foreign Minister Hossein Amirabdollahian said at a press conference in Moscow. 

Oil's decline in August marks the latest chapter in a tumultuous year, with prices driven higher in the first half by Russia's invasion of Ukraine, then undermined as central banks shifted tack and Moscow managed to keep most exports flowing. Crude's recent slump prompted OPEC+ heavyweight Saudi Arabia to float the idea the alliance could cut output, although Russian media reported the group wasn't discussing such a move at present.

The main theme “is pessimistic macro-economic expectations, coupled with tight supply from low inventories,” said Zhou Mi, an analyst at Chaos Research Institute in Shanghai, which is affiliated with Chaos Ternary Futures Co. 

Key time spreads suggest that tightness in the market has eased. WTI's prompt spread -- the difference between the two nearest contracts -- settled for the month at 52 cents a barrel in backwardation, compared with $1.87 a month ago.

“This just seems like a violent retracement in prices and spreads in oil after they failed to maintain their strength yesterday in what is an extremely illiquid market,” said Scott Shelton, an energy specialist at ICAP. 

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