Crude oil retreats amid China’s economic slowdown and ceasefire talks
Oil prices tumbled to two-week lows on Tuesday morning in Asian trade with WTI future trading down 0.4 per cent at $73.50, following 3 per cent fall of Monday. Besides, oil prices have fallen 4.5 per cent in August so far as concerns about energy demand in China, the world’s second-largest crude consumer, is bearish for oil prices.
Crude oil and gasoline prices tumbled Monday, with crude posting a one and a half week low and gasoline falling to over 5-month low. Energy demand concerns in China are undercutting crude prices. Also, a lack of retaliation, thus far, by Iran against Israel has taken some of the risk premium out of crude prices.
Rising Opec+ production
According to Energy Intelligence report, output of crude oil by all 22 members of Opec-plus rose 170,000 barrels per day in July to 41.04 million b/d, the highest level since March. For the 18 members with a production quota, output was 34.17 million b/d, a growth of 190,000 b/d compared with June.
Increased Russian crude production is negative for oil prices after Russia’s Energy Ministry reported last Friday that Russia’s July crude production was 9.045 million bpd, about 67,000 bpd above the output target it agreed to with OPEC+.
China’s weakening demand
China reported a 3 per cent drop to 42.3 million tonnes or 9.97 million barrel per day in July from a year ago, the figure’s lowest level since September 2022. Demand, meanwhile, is down 12 per cent from a month ago. The Jan-July imports totalled 317.8 million tons or 10.89 million barrels per day, down 2.4 per cent.
Chinese oil demand contracted for a third consecutive month, driven by a slump in industrial inputs. Construction activity unsurprisingly remained weak. New home starts fell by 23.2 per cent year-on-year (Y-o-Y) year-to-date (YTD), and housing completions fell 21.8 per cent Y-o-Y YTD. Property investment remained, by far, the biggest drag with a 10.2 per cent Y-o-Y YTD decline, and the industry growth moderated to 5.1 per cent Y-o-Y in July, down from 5.3 per cent Y-o-Y in June. Industrial production has been one of the key drivers for growth in H1FY24, but momentum looks to be softening in the second half of the year.
US Demand to ease down
The US oil refiners are anticipating slowdown of oil demand in US due to softening of economic activities. The unemployment rate hits 4.3 per cent and labour market hiring posted weaker hiring since July 2021 indicating hay days ahead. Signs of a weaker US gasoline demand have prompted several US refiners to reduce refining operations, a bearish factor for crude prices.
Crude oil outlook
We expect further moderation in prices as, despite the geopolitical rifts, the WTI prices have sustained above $80. Overall, crude oil prices are likely to remain within their well-established but narrowing ranges, with Brent between $75 and $85, and WTI between $72 and $83.
The biggest downside risk remains Opec+ as a production increase could hurt the current fragile sentiment, while geopolitical events and low participation from speculators are the biggest potential drivers for an upside break.
WTI Crude Oil Oct: Support: $72, Resistance: $76
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Disclaimer:Mohammed Imran – Research Analyst, Sharekhan by BNP Paribas. Views expressed are personal.
First Published: Aug 20 2024 | 10:52 AM IST