(Bloomberg) — Oil retreated for the first time in four days on the prospect of tightening U.S. monetary policy, and on signs Chinese demand will weaken due to the worst Covid-19 outbreak since the initial flareup in Wuhan.
Futures in New York fell to trade near $77 a barrel after rising 3.5% over the past three sessions. Federal Reserve officials said a strengthening economy and higher inflation could lead to earlier and faster interest-rate increases than previously expected, according to minutes published Wednesday. China has locked down some cities to try and stem the spread of the virus.
Russia and its allies, meanwhile, said they would send troops to OPEC+ producer Kazakhstan to help quell protests that posed the biggest challenge to the central Asian country’s leadership in decades.
Oil ended 2021 on a strong footing as the rollout of vaccines helped economies to reopen, boosting energy demand and allowing OPEC+ to maintain its gradual monthly output increases. Some members of the group have struggled to meet their targets, however, curbing the overall expected return of supply.
“Investors are shunning risk assets including oil on potential aggressive Fed rate hikes on top of growing demand worries surrounding China,” said Will Sungchil Yun, senior commodities analyst at VI Investment Corp. in Seoul. “Prices are likely to be under pressure for the short term.”
At the conclusion of the December meeting, the FOMC announced it would wind down the Fed’s bond-buying program at a faster pace than first outlined at the previous meeting in early November, citing rising risks from inflation. The new schedule puts the central bank on track to conclude purchases in March.
IHS Markit further lowered its projection for China’s total oil demand in the first quarter of 2022 by 420,000 barrels a day due to restrictions on mobility. Similarly, Energy Aspects Ltd. cut its first-quarter forecast by 110,000 barrels a day, while warning there is additional downside risk of between 100,000 and 300,000 barrels-a-day if more outbreaks emerge.
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