Oil slumps 3% on U.S. rail agreement, demand concerns

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By Scott DiSavino

NEW YORK (Reuters) -Oil futures fell about 3% to a one-week low on Thursday on a tentative agreement that would avert a U.S. rail strike, expectations for weaker global demand and continued U.S. dollar strength ahead of a potentially large interest rate increase.

Brent futures fell $2.70, or 2.95%, to $91.40 a barrel by 1:18 p.m. EDT (1718 GMT), while U.S. West Texas Intermediate (WTI) crude fell $2.79, or 3.2%, to $85.69.

That puts both benchmarks on track for their lowest closes since Sept. 8.

Major U.S. railroads and unions secured a tentative deal after 20 hours of intense talks brokered by President Joe Biden's administration to avert a rail shutdown that could have hit food and fuel supplies across the country and beyond.

The prospect of a strike lent the market some support on Wednesday.

That rail deal also helped pressure U.S. diesel and gasoline futures to drop more than 5% earlier in the session.

"The oil complex is drafting back down on U.S. dollar strength and the tentative agreement that would avert a U.S. rail workers strike," analysts at energy consulting firm Ritterbusch and Associates said, noting crack spreads were weak.

The U.S. 3:2:1 crack spread - a measure of refining profit margins - was on track for its lowest close since early March.

Downside risks continue to dominate the global economic outlook and some countries are expected to slip into recession in 2023, but it is too early to say if there will be a widespread global recession, according to the International Monetary Fund (IMF).

Some Wall Street indexes were in the red while the dollar held near the 20-year high it hit on Sept. 6 as investors digested stronger-than-expected economic data and prepared for an aggressive interest rate hike from the Federal Reserve next week. [USD/] [MKTS/GLOB]

A strong dollar reduces demand for oil by making the fuel more expensive for buyers using other currencies.

The International Energy Agency (IEA) said this week that oil demand growth would grind to a halt in the fourth quarter. [IEA/M]

Crude prices have dropped substantially after a surge close to its all-time highs in March after Russia's invasion of Ukraine added to supply concerns, pressured by the prospects of recession and weaker demand.

"Whilst challenging the $100 hurdle is currently not a dead cert, it seems that a bottom at around $90 has been found basis Brent, largely thanks to war-related supply fears," said Tamas Varga of oil broker PVM.

Other factors weighing on oil prices included an increase in U.S. crude inventories and an expected reduction in energy use by the Ethereum blockchain.

U.S. crude stocks rose by a more than expected 2.4 million barrels, boosted by a record weekly release from the Strategic Petroleum Reserve, which is scheduled to end next month. [EIA/S]

The European Union's executive, meanwhile, plans to raise more than 140 billion euros ($140 billion) to shield consumers from soaring energy prices by skimming off revenue from low-cost electricity generators and making fossil fuel firms share windfall profit.