Weaker-than-expected economic data out of China is depressing sentiment on the oil market at the beginning of this week, offsetting growing optimism that the U.S. economy would pull off a soft landing after all the rate hikes from the Fed.
Analysts and forecasting agencies expect a tightening market ahead with record global oil demand and curtailed supply from OPEC+ and Saudi Arabia.
Macroeconomic concerns about the world's largest and second-largest economies, the U.S. and China, respectively, persist. But fundamentals are turning more bullish, with oil demand estimated to have hit a record in June and possibly heading to a fresh record this month, per forecasts by the International Energy Agency (IEA).
Meanwhile, Saudi Arabia and OPEC+ are staying the course with the cuts, with the Kingdom extending its unilateral cut of 1 million barrels per day (bpd) into September and signaling it could extend it further, or extend and deepen it.
As expected at the beginning of the year, when China dropped its Covid restrictions, the state of the Chinese economy will be the key factor for oil prices in 2023.
Weak Chinese Data
So far, weaker-than-expected Chinese economic data have stopped price rallies in their tracks. U.S. economic prospects have turned somewhat brighter, with the Fed and investment banks no longer expecting a recession.
But persistent worries about China are holding oil prices back.
Just this week, following seven consecutive weeks of gains, oil prices dipped on Monday after China reported another set of weak economic data. Concerns about the property and credit markets in the world's second-largest economy also weighed on market sentiment.
Considering that China is expected to account for more than 70% of this year's global oil demand growth, the worries about the Chinese economy are top of the bearish factors for oil.
Chinese industrial production rose by 3.7% in July year over year, official data showed on Tuesday. The reading was below estimates of a 4.4% increase and slowing from the 4.4% growth in June. Retail sales also disappointed, increasing by only 2.5% compared to expectations of 4.5% growth and slowing from a 3.1% rise in June. Fixed asset investment also missed estimates, while investment in the property sector plunged by 8.5% year-on-year in January-July, following a slump of 7.9% in the January-June period.
Analysts have said for weeks that China needs additional policy stimulus to kickstart the lackluster rebound from the Covid lockdowns. So the central bank of China on Tuesday surprisingly cut key rates for the second time in three months, hoping to revive the economy and consumer spending.
Before Tuesday's underwhelming economic data, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Monday, "Fresh China worries potentially the trigger for a long overdue #crudeoil correction with $81.75 the big support level in Brent. IEA says China will account for 70% of this year's demand growth to a record high, hence the focus."
"Having run out of steam above $87.50 last week, a long overdue period of consolidation may now emerge with the news from China hurting sentiment," Saxo Bank said.
With most of the oil demand growth expected from China, any trouble there may sour sentiment, the bank's analysts noted.
"However, the downside risks remain limited as long as OPEC+ maintain production at current tight levels, not least considering IEA's forecast from Friday that oil demand surged to a record high in June and may rise even further."
Ed Moya, senior market analyst at OANDA, said on Monday,
"After a nice seven-week rally, oil was ripe for a pullback and China's property woes did the trick. Crude prices are lower as the rallies and concerns grow for the world's second largest economy."
"If China doesn't get some major stimulus, global growth concerns won't be going away anytime soon. The oil market is likely to remain tight, but if China jitters intensify, Brent crude could still drop a few dollars," Moya added.
Soft Landing Hopes And OPEC+ Cuts Counter Chinese Gloom
The weak Chinese economic data has been offset in recent weeks by expectations of a soft landing of the U.S. economy and a tightening oil market thanks to the collective cuts from OPEC+ and the additional output reduction from Saudi Arabia.
"Prepare for a Soft Landing," Bank of America (BofA) economists said in early August, after revising their outlook for the U.S. economy in favor of a soft landing, where growth falls below trend in 2024 but remains positive throughout the forecast horizon. BofA now forecasts U.S. GDP growth of 2.0% (4Q/4Q) this year, 0.7% in 2024, and 1.8% in 2025.
At the same time, global oil demand hit a record 103 million bpd in June, and August could see yet another peak, the IEA said in its closely-watched Oil Market Report (OMR) for August. World oil demand is set to grow by 2.2 million bpd this year, with China accounting for more than 70% of growth, the agency noted.
With China the biggest growth driver of global oil demand growth, the market will need a clear indication from Chinese policymakers that they would do whatever it takes to support the economy.
By Tsvetana Paraskova for Oilprice.com
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