Oil falls on worries of U.S. rate hikes, China demand outlook

By Arathy Somasekhar

HOUSTON (Reuters) -Oil prices fell more than 3% on Thursday, with demand squeezed by mounting COVID-19 cases in China and fears of more aggressive hikes in U.S. interest rates.

Brent crude fell $3.08 to settle at $89.78 a barrel, down 3.3%. U.S. West Texas Intermediate (WTI) crude slid $3.95, or 4.6%, to settle at $81.64 per barrel.

"It's kind of a triple whammy. We've got COVID-19 cases rising in China, interest rates are continuing to rise here in the U.S. and now we've got technical weakness in the market," said Dennis Kissler, senior vice president of trading at BOK Financial.

St. Louis Federal Reserve President James Bullard said a basic monetary policy rule would require interest rates to rise to at least around 5%, while stricter assumptions would recommend rates above 7%.

The dollar also rose as investors digested U.S. economic data. A stronger dollar makes dollar-denominated oil more expensive for holders of other currencies.

China reported rising daily COVID-19 infections and Chinese refiners have asked to reduce Saudi crude volume in December, Reuters has reported, while also slowing Russian crude purchases.

While China's COVID case load is smaller than that of other countries, the world's largest crude importer maintains stringent policies to quash early outbreaks, dampening fuel demand.

On technical indicators, U.S. front-month futures fell below the 50-day simple moving average, triggering liquidation by funds, Kissler said, adding he expects the pressure to continue early next week.

"The market is really getting caught up for the potential of serious demand destruction, and we're definitely seeing the mood shift to the downside," said Phil Flynn, an analyst at Price Futures group.

Poland and NATO on Wednesday said a missile that crashed inside the country was probably a stray fired by Ukraine's air defences and not a Russian strike, easing fears the Russia-Ukraine war could widen.

"Thankfully, those fears have abated and the situation de-escalated, which has seen oil gains unwound," said Craig Erlam, senior market analyst at OANDA. "China remains a downside risk for oil in the near term."

Oil gained support from official figures showing U.S. crude stocks fell by a bigger than expected 5 million barrels in the latest week. [EIA/S]

Supply is also tightening in November as OPEC and its allies, known collectively as OPEC+, implement their latest output controls to support the market.

(Reporting Arathy Somasekhar in Houston and Alex Lawler in LondonAdditional reporting by Emily Chow and Jeslyn LerhEditing by Kirsten Donovan, Matthew Lewis and David Gregorio)