Oil prices experienced a significant drop on Friday, falling more than $2 per barrel, with Brent crude dipping below the $80 mark. This decline has set the stage for a weekly loss, driven primarily by renewed concerns over China's economic health, which have overshadowed lingering geopolitical risks in the Middle East.
By early afternoon in London, Brent crude futures had dropped $1.59, or 2%, to $79.45 per barrel. Meanwhile, U.S. West Texas Intermediate (WTI) crude futures fell by $1.71, or 2.2%, settling at $76.45 per barrel. The slide in prices highlights the market's struggle to maintain the $80 per barrel threshold, which was recently regained but now appears precarious.
"The oil market is struggling to retain its recently recaptured $80 per barrel floor as the recent string of weak macroeconomic indicators reassert their downward pressure while geopolitical concerns appear to fade into the background," commented Harry Tchilinguirian, head of research at Onyx Capital Group.
China, the world's largest importer of crude oil, has been at the center of market anxieties. Premier Li Qiang emphasized the need for "great efforts" to boost the economy, according to state media, following a series of disappointing data releases. July figures showed that new home prices in China fell at their fastest pace in nine years, industrial output slowed, and unemployment rates rose. This downturn has raised concerns about the country's demand for crude oil, further exacerbated by reports that Chinese refineries significantly reduced their crude processing rates last month due to tepid fuel demand.
The impact of these economic woes is evident in the shifting dynamics of the Brent futures curve. The market is showing signs of reduced backwardation, a scenario where current prices are higher than future prices, which typically discourages energy firms from storing fuel. "The shape of the Brent futures curve is also changing this morning in favor of less backwardation, as the market reassesses the relative availability of crude in view of disappointing crude import and refinery runs figures out of China," Tchilinguirian added.
The Organization of the Petroleum Exporting Countries (OPEC) also recently trimmed its demand outlook for the year, citing softer expectations for China's economy. Adding to the pressure on prices was the resumption of flows to Libya's Es Sider port by the Waha Oil Company after maintenance work on a pipeline was completed.
Despite these bearish signals, some factors provided a modest floor to oil prices. U.S. retail sales data released on Thursday exceeded analysts' expectations, and fewer Americans filed for unemployment benefits, suggesting renewed optimism around U.S. economic growth. However, this positive sentiment was not enough to counterbalance the broader concerns about China.
Geopolitical tensions, which had previously supported oil prices, appeared to take a backseat this week. Although a fresh round of negotiations began on Thursday to secure a ceasefire in the Gaza war, and analysts remain vigilant about potential Iranian retaliation over the killing of Hamas political leader Ismail Haniyeh in Tehran, these concerns have not translated into sustained upward pressure on oil prices. "Expectations remain that a response will happen given that Iran needs to save face among neighboring states," said Panmure Liberum analyst Ashley Kelty, yet the market reaction has been muted.
The market is now turning its attention to the upcoming September meeting of the U.S. Federal Reserve, which could influence future oil prices depending on whether the Fed decides to cut interest rates. Independent oil analyst Gaurav Sharma noted, "The real breakout from range-bound, and potentially firmer, Brent crude prices will likely come when the U.S. Federal Reserve makes a call on whether to cut interest rates or not."
