Days after the EU's $60/barrel price cap kicked in, oil prices slump to pre-Ukraine war levels over economic uncertainty

• Oil futures slumped Tuesday to levels not seen before Russia invaded Ukraine.
• Traders are worried about oil demand in the face of economic uncertainties.

Just days after an EU price cap of $60 a barrel price cap for Russian crude kicked in, oil futures slumped to levels not seen before the Ukraine invasion, as jittery traders exit the market ahead of the holiday season.

On Tuesday, US West Texas Intermediate oil futures tanked 3.5% to their lowest settlement price this year at $74.25 a barrel, while international Brent crude futures settled 4% lower at $79.35 a barrel. In early Asian trade on Wednesday, US WTI oil futures were down 0.3% at $74.05 a barrel, while international Brent crude oil futures were 0.1% lower at $79.29 a barrel.

Data from the Intercontinental Exchange shows traders reducing their net long positions in Brent futures by about one-third in the week to last Tuesday, wrote ING commodity strategists Warren Patterson and Ewa Manthey in a Monday note.

"This is the smallest net long speculators have held since November 2020 and reflects growing demand concerns," the ING strategists added.

Oil market sentiment has been on a roller-coaster ride lately. Tuesday's bearish sentiment contrasted with optimism earlier in the week — oil prices had risen on indications that major oil consumer China is easing its strict COVID-19 restrictions and OPEC stuck to its production cut target.

However, the price cap on Russian crude continues to spark uncertainty in the oil markets. Continued tensions could send prices soaring if Russia can't find enough "dark ships" — vessels that turn off tracking devices — to export crude covertly.

Another key factor damping market sentiment is the resilient US economy, as it's raising questions about whether the Fed would actually ease its aggressive interest rate hikes to curb inflation.

Market concerns about economic growth and demand for crude could spur OPEC to follow through with oil production cuts in the future, Yeap Jun Rong, a market strategist at online trading platform IG, wrote on Wednesday. Oil prices could fall further ahead of OPEC's next meeting in February 2023 due to lack of clarity about the group's strategy, Yeap added.