Oil plunges $5 in biggest drop of the year as demand worries hit market

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Oil prices plunged by more than $5 a barrel on Wednesday over concerns that sharp increases in borrowing costs caused by higher interest rates could dent economic growth.

Brent crude, the global benchmark, settled $5.11 a barrel, or 5.6 per cent, lower at $85.81 a barrel after its sharpest decline since August 2022. West Texas Intermediate, the US marker, fell 5.6 per cent to $84.22.

The sudden decline surprised investors, who just last week saw prices come close to $100 a barrel on robust global demand and Saudi Arabia and Russia’s decision to extend oil production cuts to the end of 2023.

“This is a speed run by the market,” said Stephen Ellis, an analyst at Morningstar.

The fall came in a week when surging interest rates gripped markets and pointed to new pressures on the economy, which could weigh on oil consumption. Yields on benchmark 10-year US Treasury notes hit a 16-year high of 4.88 per cent on Wednesday, before falling back slightly in late afternoon trading.

“Higher interest rate costs have the potential to trim growth prospects in the short run, and ultimately negatively impact oil demand,” Ellis said.

For WTI futures that are traded on CME Group’s Nymex exchange, net bullish positions held by money managers have built up since the summer. “Given the speculative length built up in WTI, it was stretched taut like a rubber band, hence a couple of bearish triggers caused prices to snap back in short, sharp fashion,” said Matt Smith, an analyst at Kpler, a consultancy.

The US Energy Information Administration reported on Wednesday that domestic stocks of petrol rose by 6.5mn barrels last week, while stocks of crude fell by 2.2mn barrels. Analysts at JPMorgan Chase said that “demand restraint from rising oil prices is once again becoming visible” in the US, Europe and some emerging market countries.

Energy stocks were among the worst performers in the S&P 500 stock index, with ConocoPhillips, ExxonMobil and Chevron dropping 4.7 per cent, 4.2 per cent and 2.9 per cent, respectively.