Oil prices rebound after hitting nine-month low as dollar rally eases

Oil prices rebounded on Tuesday after hitting a nine-month low, while the US dollar rally took a breather even as demand concerns persist on a potential global recession and a tighter monetary policy outlook.

Prices, which touched their lowest level since January on Monday due to global slowdown fears and the strengthening dollar, also rallied higher amid talks that Russia could propose that Opec+ super group of oil producers reduces oil output by about 1 million barrels per day at its next meeting on October 5.

Brent, the benchmark for two thirds of the world's oil, was trading 1.83 per cent up at $85.60 a barrel at 9.10pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 1.56 per cent at $77.91 a barrel.

Although oil prices recovered on Tuesday, investors continue to consider the impact of a potential recession and monetary tightening by central banks on global demand.

"Oil prices are recovering following the sell-off over the last couple of sessions," said Craig Erlam, senior market analyst at Oanda. "The prospect of a deeper economic slowdown, perhaps even global recession, has naturally turned traders more bearish on the price of oil as demand would naturally slump in those circumstances relative to prior expectations."

The downward trend looks set to continue, said Giovanni Staunovo and Wayne Gordon, strategists at UBS.

“Oil prices are trading at their lowest level since January. Prices may remain depressed in the near term due to broader risk-off sentiment, US dollar strength, and overall uncertainty,” they said.

Crude is on its way to a quarterly slump, as leading central banks, including the US Federal Reserve, increase interest rates aggressively to fight inflation.

Last Wednesday, the Fed raised its key interest rate by 75 basis points, its third consecutive three-quarters of a percentage point increase. It also hinted at further increases to tame surging inflation. The Bank of England also raised its base interest rate by 0.5 percentage points to 2.25 per cent on Thursday, vowing to “respond forcefully, as necessary” to soaring inflation.

Meanwhile, the growing strength of the greenback is also affecting oil prices, since crude, which is priced in US dollars, becomes more expensive for buyers using weaker currencies.

“US dollar strength limits the ability of consuming nations whose currencies are not linked to the greenback to take advantage of lower oil prices,” said the UBS analysts.

“Only a production cut by Opec+ can break the negative momentum in the short run," they said.

The recent slump in prices may prompt the super group of oil producers, which is scheduled to meet on October 5, to consider intervening to stem the slide.

However, analysts believe such a move is unlikely.

“Opec+ is likely waiting until its scheduled meeting next week before it announces any more production changes, which are only likely to be downward,” Emirates NBD said.

Earlier this month, the alliance agreed to cut its October output by 100,000 barrels per day, reverting to August production levels to support prices.

However, a modest supply cut may be ineffective, analysts say.

“As many Opec+ nations produce below their quota, any effective cut would likely be smaller than the agreed number,” the UBS analysts said.

Looking ahead, threats to demand remain as monetary policy is set to tighten further.

"We could see further pressure on oil prices if economic woes continue to dominate and traders want to test the resolve of the alliance in the face of severe global economic risk," Mr Erlam said.