Oil declines as slowdown risks weighed against robust demand

Oil fell as investors weighed the odds of an economic slowdown in the US as the Federal Reserve tightens policy against signs global energy markets remain tight.

West Texas Intermediate traded below $108 a barrel after closing up 1 per cent on Tuesday. With investors concerned about the impact of higher US interest rates, Fed Chair Jerome Powell is due to testify before Congress later Wednesday on his quest to reduce inflation that’s raging at the fastest pace in decades.

President Joe Biden will call for a gasoline tax holiday, a person familiar with the plan said, as prices at the pump keep rising. The average US retail price for the fuel topped $5 a gallon this month after surging more than 50 per cent in 2022.

Oil is headed for a ninth straight quarterly gain as the fallout from the crisis in Ukraine and increased consumption offset concerns about a broad economic slowdown. Supermajor Exxon Mobil Corp. warned this week that crude markets may remain tight for another three to five years, while Vitol Group, the world’s largest independent oil trader, has flagged rising fuel demand in China.

Oil markets remain in backwardation, a bullish pattern that’s marked by near-term prices trading above longer-dated ones. Brent’s prompt spread – the difference between its two nearest contracts – was $2.86 a barrel in backwardation, compared with $2.73 a barrel at the start of this month.

“With commodity demand above supply, markets remain tight even as growth rates slow, as evidenced by the high level of prompt backwardation in key markets like oil,” Goldman Sachs Group said in a note. “Investors should remember that Fed-induced slowdowns are simply a short-term abatement of the symptom, inflation, and not a cure for the problem, underinvestment.”