Crude oil headed for a third monthly drop, the longest declining streak in more than two years, on likelihood of slower global growth as central banks tighten policy and China presses on with its Covid Zero strategy.

West Texas Intermediate, which traded above $92 a barrel after tumbling on Tuesday, has shed more than 6 per cent in August, hitting the lowest since January mid-month. In the US, the Federal Reserve has been raising rates aggressively to quell inflation, while Europe is gripped by an energy crisis that may herald a recession. In Asia, growth in China, the top oil importer, has slowed.

Traders are also tracking an array of supply-related issues. 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.

OPEC+ talks on output cut?

Oil’s decline in August marks the latest chapter in what’s been 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 raise the possibility the alliance could cut output, although Russian media reported the grouping 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.

China hits slowdown lane

Data on Wednesday highlighted the challenges facing China. Factory activity contracted in August for a second month, with the economy taking a hit from Covid-19 outbreaks, a property market crisis and power shortages.

Commodities including crude oil have also faced a headwind this month from gains in the dollar, which makes raw materials more expensive for holders outside the US. The Bloomberg Dollar Spot Index has climbed by more than 2 per cent in August as the Federal Reserve commits to higher interest rates, with the gauge approaching a record high that was hit in July.

Key time spreads suggest that tightness in the market has eased. WTI’s prompt spread -- the difference between the two nearest contracts -- was 49 cents a barrel in backwardation, compared with $1.87 a month ago.

An insight into market conditions in the US will come later on Wednesday when the Energy Information Administration issues its weekly analysis of supply and demand.

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