Oil Sinks Further to Test OPEC’s Resolve Amid Demand Concerns

West Texas Intermediate futures dropped below $88 a barrel, after falling for a third consecutive month in August in the longest run since April 2020. Investors are focusing on tighter monetary policy around the world that could crimp economic growth and eventually hit oil demand. The lock down of the Chinese megacity of Chengdu to contain a Covid-19 outbreak added to the negative sentiment.

“The fuel for the drop is most certainly what is driving every asset class lower this week and that is the hawkish rhetoric from the Federal Reserve,” said Ole Hansen, Saxo Bank’s head of commodity strategy. “But in addition, the demand outlook for China looks dire — it’s settling into a 9-10 million barrel a day consumption rate compared with 10-12 in recent years.”

Oil slumped by more than 20% in the three months through August, overturning all of the gains since Russia’s invasion of Ukraine at the end of February. It has prompted Saudi Arabia to signal that the Organization of Petroleum Exporting Countries and its allies could cut supply. The group is scheduled to gather on Monday to discuss output policy.

“What it could translate into is OPEC potentially once again cutting production if prices get too low, that makes me believe that the downside is limited ahead of Monday’s meeting,” Hansen said.

Among the items that OPEC+ ministers may weigh up is a US-led plan to cap the price of Russian crude in a bid to deprive Moscow of funds amid the war in Ukraine. The proposal has been gathering support, with the UK government signaling its approval. Group of Seven finance ministers including Treasury Secretary Janet Yellen are due to discuss the proposal on Friday.

Strength in the greenback has added to headwinds for dollar-denominated commodities, as the pricier currency makes them more expensive for overseas buyers. The Bloomberg Dollar Index rose toward the highest level on record following a run of three monthly gains.