Oil dips 2% on economic woes and stronger dollar

HOUSTON, April 25 (Reuters) – Oil dropped 2% to its lowest this month on Tuesday after two sessions of gains, as deepening concerns of an economic slowdown and a stronger dollar outweighed hopes of higher Chinese demand.

Brent crude fell by USD 1.96, or 2.4%, to settle at USD 80.77 a barrel, its lowest close since March 31, before OPEC announced plans to cut production.

US West Texas Intermediate crude dropped USD 1.69, or 2.2%, to close at USD 77.07, also its lowest this month.

On Monday, both contracts rose by more than 1%.

US consumer confidence dropped to a nine-month low in April, feeding worries about a recession the day after regional lender First Republic (FRC) reported a flight in deposits of more than USD 100 billion, stoking fears of a potential banking crisis.

“Oil prices looked as if they were going to mount a rally before old banking worries re-emerged,” said Phil Flynn, an analyst at Price Futures Group.

The dollar rose on deepening worries about corporate earnings and the global economy. A stronger dollar pressures oil demand by making the commodity more expensive for buyers holding other currencies.

Gold prices also were flat as the dollar strengthened, while US stocks fell as weak earnings fanned economic fears.

Investors remained wary that possible interest rate hikes by inflation-fighting central banks could slow economic growth and dent energy demand in the United States, Britain, and the European Union.

The US Federal Reserve, the Bank of England, and the European Central Bank are all expected to raise rates at their coming meetings. The Fed meets May 2-3.

Oil traders also worried that weak refining margins globally could force refiners to curb oil buying.

“The near-term pressure has been from rising interest rates and refinery run rate margins contracting, which could be a sign demand is slipping,” said Dennis Kissler, senior vice president of trading at BOK Financial

Early in the session, oil prices rose, supported by optimism that holiday travel in China would boost fuel demand and by expectations of a drop in US crude inventories.

US crude oil stocks fell by about 6.1 million barrels in the week ended April 21, according to market sources citing American Petroleum Institute figures on Tuesday. Analysts had expected crude inventories to fall by about 1.5 million barrels.

Gasoline inventories also fell last week, while distillate inventories rose, the sources added. Official stockpiles data from the US government is due Wednesday.

Involuntary and planned supply cuts also lent support. Iraq’s northern oil exports have shown little sign of an imminent restart after a month-long standstill, while members of the OPEC+ producer group prepared for the start of voluntary output cuts in May.

(Reporting by Arathy Somasekhar; Additional reporting by Alex Lawler, Stephanie Kelly, and Emily Chow; Editing by Christina Fincher, Barbara Lewis, David Goodman, David Gregorio, and Sonali Paul)