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Title: Oil Rebounds After Two-Day Drop as Traders Weigh Products, China

May 19, 2022 01:09AM ET

By: AnalysisWatch

Oil prices rebounded after a two-day slump triggered by concerns about a global economic downturn, thanks to strength in product markets.

West Texas Intermediate reversed early losses to trade above $110 a barrel after losing 4% in the previous two sessions. Investors shunned stocks and many commodities after Federal Reserve officials reiterated that a much tighter monetary policy is coming to cool the overheated economy and rein in inflation.

The outlook for crude oil was also clouded by China struggling to contain a wave of COVID-19 infections. While the financial center of Shanghai has gradually recovered from the strict lockdown, other cities have seen new outbreaks and Beijing has experienced disruptions. The country is the world's largest oil importer.

Since late February, when Russia's incursion into Ukraine rattled energy flows, the global oil market has been characterized by volatility. Despite recent weakness, prices have continued to rise by more than 40% this year, driven by strength in product markets, declining inventories and record gasoline prices.

U.S. data released this week painted a largely positive picture for crude ahead of the driving season.

"Oil as a financial asset is facing headwinds as an economic slowdown and inflation concerns point downward," said Gui Chenxi, an analyst at CITIC Futures Co. Still, low U.S. inventories are providing some support, she said.

Oil markets remain in backwardation, a bullish pattern characterized by short-term prices being higher than longer-term prices. Brent's prompt spread-the difference between the two closest contracts-was $2.13 a barrel in backwardation, up from $1.46 a week ago.

Following the Russian attack, the U.S. and the United Kingdom imposed a ban on imports of Russian crude to punish and isolate Moscow. The European Union is trying to impose a similar embargo on the bloc but is facing opposition from Hungary.

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