Oil drops, pressured by economic worries, strong dollar

© Reuters. FILE PHOTO: A sticker reads crude oil on the side of a storage tank in the Permian Basin in Mentone, Loving County, Texas, U.S. November 22, 2019. REUTERS/Angus Mordant

By Arathy Somasekhar

HOUSTON (Reuters) - Oil prices fell $1 on Tuesday, with the demand outlook pressured by coronavirus lockdowns in China and growing recession risks, while a strong dollar made crude more expensive for buyers using other currencies.

Brent crude was down $1.97, or 1.9 %, at $103.97 a barrel by 11:17 EDT (1517 GMT). U.S. West Texas Intermediate crude fell $1.90, or 1.8%, to $101.23 a barrel.

Early in the session, comments from the Saudi and UAE energy ministers boosted Brent and WTI up by over $1 a barrel. Also, traders wondered whether the European Union nations would all agree to bar Russian crude imports.

"As the EU continues to dither over whether or not they are going to embargo that Russian oil, that changes the calculus very much as well in both directions," said John Kilduff, a partner at Again Capital LLC.

"These are volatile times, the daily price bars are outsized these days." he added.

The EU Commission has delayed acting on the proposal. Unanimity is required to ban oil imports from Russia, and Hungary has dug in its heels opposing an embargo.

Also, some European economies could suffer distress if Russian oil imports were curtailed further. If Russia retaliated by cutting off gas supplies, economies in emerging Europe, central Asia and north Africa might slide back to pre-pandemic levels, the European Bank for Reconstruction and Development (EBRD) warned.

French European Affairs Minister Clement Beaune said EU members could reach a deal this week on Russian oil sanctions.

In addition to the recent G7 gradual import ban on Russian oil, Japan, which obtained 4% of its oil imports from Russia last year, has agreed to phase out Russian oil purchases. The timing and method have yet to be decided.

"The combination of COVID-related lockdowns in China and worldwide interest rate increases to battle inflation put equity investors on the back foot, strengthened the dollar and significantly raised concerns of economic slowdown," said Tamas Varga of oil broker PVM.

Cleveland Federal Reserve Bank President Loretta Mester said raising interest rates in half-point increments "makes perfect sense" for the next couple of Fed meetings, and that ultimately rates will need to rise above 2.5% to control inflation.

The European Central Bank should raise interest rates in July to stop high inflation from getting entrenched, Bundesbank chief Joachim Nagel said.

The dollar held near a two-decade high ahead of a reading on inflation that could hint at the outlook for Federal Reserve policy.

European refiners' crude and oil products stocks stood at about 1 billion barrels in April, down 10.3% year on year but nearly the same level as in March, Euroilstock data showed. Middle distillate stocks fell by 15.4% on the year in April, and by almost 3% from March, the data showed.

In the United States, crude, distillates and gasoline inventories likely fell last week, a preliminary Reuters poll of weekly data showed on Monday. [EIA/S]