Oil dips $2 as economic uncertainty outweighs China optimism

Oil dropped by $2 a barrel on Tuesday after two sessions of gains as jitters about the global economic outlook and a firmer dollar countered optimism about demand in China and expectations of a drop in U.S. crude inventories. Brent crude fell by $1.93, or 2.4%, to $80.80 a barrel. U.S. West Texas Intermediate crude dropped $1.73 to $77.02. On Monday, both contracts rose by more than 1%. A survey on showed U.S. consumer confidence fell to a nine-month low in April, feeding worries about a recession the day after regional lender First Republic reported a more than $100 billion flight in deposits, stoking fears of a potential banking crisis.

The dollar rose on deepening worries about corporate earnings and the global economy. A stronger dollar pressures oil demand by making the commodity more expensive for buyers holding other currencies. “A recovering dollar is weighing on sentiment,” said Stephen Brennock of oil broker PVM. “I suspect that upcoming macro releases concerning U.S. house prices and consumer confidence are also keeping buyers on the sidelines.” Investors remain wary that possible interest rate hikes by inflation-fighting central banks could slow economic growth and dent energy demand in the United States, Britain and the European Union. The U. S. Federal Reserve, the Bank of England and the European Central Bank are all expected to raise rates at their coming meetings. The Fed meets over May 2-3.

Also worrying markets were weak refining margins globally that could force refiners to curb oil buying. “The near term pressure has been from rising interest rates and refinery run rate margins contracting, which could be a sign demand is slipping,” said Dennis Kissler, senior vice president of trading at BOK Financial Early in the session, oil prices rose, supported by optimism that holiday travel in China would boost fuel demand and by expectations of a drop in U.S. crude inventories. Involuntary and planned supply cuts also lent support. Iraq’s northern oil exports have shown little sign of an imminent restart after a month-long standstill. Members of the OPEC+ producer group are preparing for the start of voluntary output cuts in May. Traders were awaiting U.S. stockpiles data from the American Petroleum Institute on Tuesday. Analysts expect crude inventories to fall by about 1.7 million barrels.