Oil headed for the biggest weekly drop since March as worries over the global economy clouded the demand outlook, with commodities rocked by gains in the US dollar and a surge in bond yields.
West Texas Intermediate held above $82 a barrel, after closing at the lowest level since late August on Thursday. The US crude benchmark has tumbled more than 9% for the week, with deep losses Wednesday and Thursday. The sudden, marked reversal has boosted measures of market volatility.
Oil lost ground this week following a poor print for US gasoline consumption, coupled with a rise in inventories of the motor fuel. That’s ignited a debate about whether an earlier run-up in prices was destroying product demand, although Goldman Sachs Group Inc. says that the concerns are overdone.
“The decline in gasoline demand is unsurprising as inflation’s erosion on household budgets comes home to roost,” said Vishnu Varathan, head of economics & strategy for Asia ex-Japan at Mizuho Bank Ltd. Still, oil will remain volatile through the first quarter as supplies remain tight, he added.
After soaring in the third quarter as OPEC+ leaders Saudi Arabia and Russia choked off supply and inventories fell, crude’s rally has been thrown into reverse in the last week and a half as macroeconomic concerns escalated. Still, both Moscow and Riyadh have reaffirmed their commitment to output cuts through to the year-end, with Saudi Arabia also hiking its official selling prices.
Crude’s selloff has been fueled in part by a rally in the US dollar, which is making commodities more expensive for most buyers. In addition, the rapid and marked jump in bond yields threatens to undercut economic growth by raising borrowing costs for consumers and companies, potentially harming energy consumption.
Oil’s near-term outlook will be shaped later Friday by monthly US payrolls data. The strength of the figure will influence expectations for the next steps from the Federal Reserve, which has been hiking rates to quell inflation.
Crude market timespreads have softened this week, suggesting slightly looser conditions. WTI’s prompt spread — the difference between its two nearest contracts — was $1.51 a barrel in backwardation. While that remains a bullish pattern, it’s down from almost $2 a barrel a week ago.
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