Oil Prices Dip Amid Weak Chinese Demand And U.S. Economic Developments

Oil Prices Dip Amid Weak Chinese Demand and U.S. Economic Developments

Oil prices declined on Monday as concerns over demand in China, the world’s largest crude importer, outweighed supportive factors such as U.S. economic optimism, OPEC+ supply cuts, and geopolitical tensions in the Middle East.

Brent crude futures fell by 18 cents (0.2%) to close at $84.85 per barrel, while U.S. West Texas Intermediate (WTI) crude dropped 30 cents (0.4%) to settle at $81.91.

Chinese Demand Slows
UBS analyst Giovanni Staunovo pointed to weaker data from China, including a decline in refinery runs and crude imports, which weighed on market sentiment. “Chinese data … are not supportive, but demand growth elsewhere is still healthy,” Staunovo said.

China’s economy has faced significant headwinds, with growth slowing sharply in the second quarter amid a prolonged property downturn and rising job insecurity. These challenges have spurred speculation that Beijing will introduce additional stimulus measures to boost recovery.

Refinery output in China fell by 3.7% year-on-year in June, marking the third consecutive monthly decline, as planned maintenance and lower profit margins led independent plants to scale back operations.

U.S. Economic Outlook
In contrast, U.S. economic developments offered some optimism. Federal Reserve Chair Jerome Powell commented that recent inflation data indicate progress toward the central bank’s target, fueling speculation that interest rate cuts may be on the horizon.

The Federal Reserve’s aggressive rate hikes in 2022 and 2023 raised borrowing costs and dampened economic growth, which reduced oil demand. A potential shift toward rate cuts, however, could bolster energy consumption.

Market predictions now suggest a 94.4% chance of the Fed lowering rates by at least 25 basis points in September, according to the CME FedWatch Tool.

Middle East Tensions Provide Limited Support
Geopolitical unrest in the Middle East continued to lend some support to oil prices. Over the weekend, two vessels were attacked near Yemen’s port city of Hodeidah, with one ship reportedly sustaining damage. While no group immediately claimed responsibility, Iran-backed Houthi militants have previously targeted Red Sea shipping lanes in solidarity with Palestinians affected by the Gaza conflict.

Analysts, however, noted that ample spare capacity held by Saudi Arabia and other OPEC members has moderated the upward pressure on prices.

OPEC+ Supply Cuts and Market Balancing Efforts
OPEC+ members, including Russia, have maintained production cuts to stabilize the market. Iraq announced plans to compensate for overproduction earlier this year, while Russia reaffirmed its commitment to balancing global supply.

Deputy Prime Minister Alexander Novak stated that the global oil market is expected to stabilize in the second half of 2024 due to OPEC+ agreements. The group’s current output reduction of 2.2 million barrels per day, set to phase out gradually after September, has helped support prices despite fluctuating demand.

In Russia, Novak suggested the possibility of reinstating a gasoline export ban in August if domestic supply shortages persist.

Overall, the oil market remains influenced by a complex interplay of slowing Chinese demand, potential U.S. economic policy shifts, and ongoing geopolitical risks.