Oil prices experienced a notable decline on Thursday, driven by weak demand signals from China, despite positive inventory data from the United States. This drop comes as the market grapples with the implications of lower Chinese consumption, which overshadowed the previous day's data showing significant draws on U.S. inventories.
Brent crude futures for September fell $1.01, or 1.2%, to $80.70 a barrel by 11:17 GMT. Similarly, U.S. West Texas Intermediate (WTI) crude for September decreased by $1.2, or 1%, to $76.67. Both benchmarks had risen on Wednesday after the Energy Information Administration (EIA) reported that U.S. crude inventories fell by more than expected, dropping by 3.7 million barrels last week. Additionally, U.S. gasoline stocks saw a significant decrease of 5.6 million barrels, far exceeding analyst expectations of a 400,000-barrel draw.
"Despite draws in U.S. crude and gasoline stocks, investors remained wary about weakening demand in China and expectations of advancing ceasefire talks between Israel and Hamas added to pressure," said Hiroyuki Kikukawa, president of NS Trading, a subsidiary of Nissan Securities.
China's economic data has painted a less optimistic picture for oil demand. The country's oil imports and refinery runs have been lower than in 2023, reflecting weaker fuel demand amid sluggish economic growth. "Growing concerns over the strength of oil demand in the short to medium term have acquired a strong grip on market sentiment," noted Vandana Hari, founder of oil market analysis provider Vanda Insight.
In the geopolitical sphere, efforts to negotiate a ceasefire to end the conflict in Gaza between Israel and the militant group Hamas have been gaining traction. A successful ceasefire could reduce threats to oil supply from the region, potentially driving prices lower.
Meanwhile, the U.S. Federal Reserve is expected to cut interest rates only twice this year, in September and December, according to a Reuters poll of economists. Despite easing inflation, resilient U.S. consumer demand has prompted a cautious approach from the Fed. Lower interest rates are typically associated with economic growth, which can lead to increased oil consumption.
Adding to the market's concerns, China's central bank cut interest rates again on Thursday. The People's Bank of China reduced rates from 2.5% to 2.3%, a move seen as a response to weak economic growth, exacerbating fears of shrinking demand.
On the supply side, Russia, Kazakhstan, and Iraq have formulated plans to compensate for overproduction, aiming to comply with OPEC+ output cuts. According to OPEC, the excess production volumes will be fully compensated over the next 15 months, with Russia, Iraq, and Kazakhstan collectively committing to significant production reductions.
This week, major oil companies such as Exxon, Shell, and BP warned of declining refining margins, which are expected to impact Q2 earnings. On Thursday, European refiners like French TotalEnergies and Neste echoed these concerns, citing sluggish demand and weaker profit margins. TotalEnergies reported a 34% drop in operating income for its refining and chemicals divisions in the quarter.
In Canada, hundreds of wildfires continue to burn across the western provinces of British Columbia and Alberta, including near the oil sands hub of Fort McMurray, adding another layer of uncertainty to the market.
