China COVID-Induced Oil Price Decline May Drive the Price of a Barrel Below $85

The picture for oil bulls is unfavorable, and things could worsen before they improve.

New COVID-related lockdowns in China have prolonged the oil selloff for a third day in a row, boosting the likelihood that U.S. crude will go below $85 per barrel for the first time since late January.

Brent crude, the global benchmark for oil traded in London, closed at $92.36 a barrel, down $3.28, or 3.4%, from its session low of $93. Brent prices fell 2.8% on Wednesday and 5% on Tuesday, respectively.

West Texas Intermediate, the standard for U.S. crude traded in New York, finished at $86.61, down $2.94, or 3.3%. Tuesday's decline was 5.5%, while Wednesday's decline was 2.3%.

Thursday's WTI session low was $86, just $1 away from breaching the $85 support.

"From a technical perspective, a break below $85 might drive WTI to test the monthly $82 Middle Bollinger Band," said Sunil Kumar Dixit, chief technical strategist at SKCharts.com. In the case of a fall, the price might reach $77.98 before resuming its climb to the $97-$99 resistance zone.

Again, this is a technical point of view. Obviously, from a broader view on oil, the fundamentals must also be considered," noted Dixit.

Even prior to the China COVID scandal, the fundamentals were at best unclear.

Wednesday, when traders anticipated the oil producing coalition to announce production cuts, OPEC+ gave a more positive demand outlook.

OPEC+ reduced its oil surplus prediction for 2022 to 400,000 barrels per day and predicted a shortage of 300,000 barrels per day for 2023.

The monthly meeting of the 23-nation OPEC+, comprised of the original 13 members of the Saudi-led Organization of Petroleum Exporting Countries and its 10 Russia-led allies, will be held on September 5. If it does not announce any reductions at that time, oil prices may continue to decrease due to fears of weak seasonal demand beginning on September 22.

The White House said on Thursday that Vice President Joe Biden met with Israeli Prime Minister Yair Lapid on Wednesday regarding the revival of a 2015 nuclear agreement that is fervently desired by Iran but fiercely opposed by Israel. This knowledge contributed to Thursday's rise in oil prices. The prospective easing of U.S. sanctions on Iranian oil, which may enhance crude exports by up to one million barrels per day, is at stake.

As reported by Reuters on Thursday, Asia's factory activity dropped in August as China's zero-COVID regulations and cost limits continued to damage businesses, dimming the outlook for the region's weak recovery.

Baoan, the most populous district of Shenzhen, suspended large-scale events and indoor entertainment for three days as the number of COVID-19 cases continued to rise.