Oil prices began the week on a downward trajectory, with Brent crude holding below the $80 mark, as concerns over weakening demand from China, the world's largest oil importer, dampened market sentiment. By mid-morning in London, Brent crude futures had slipped 63 cents, or 0.8%, to $79.05 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 71 cents, or 0.9%, to $75.94 a barrel.
This decline extends the nearly 2% drop both benchmarks experienced last Friday, as investors adjusted their expectations for Chinese demand growth. Despite the decline, the week ended largely unchanged for oil prices, buoyed by U.S. economic data that showed inflation moderating despite robust retail spending.
"Persistent concerns about slow demand in China led to a sell-off," commented Hiroyuki Kikukawa, president of NS Trading. Kikukawa also noted that the upcoming end of the peak driving season in the United States contributed to the downward pressure on prices. However, he pointed out that supply risks stemming from the ongoing conflict in the Middle East and the escalating war between Russia and Ukraine continue to support the market, preventing a steeper decline.
Recent customs data from China has added to market jitters, showing a significant drop in the country's diesel and gasoline exports in July, a reflection of lower crude processing levels as profit margins for refineries remained weak. This decline in exports signals reduced demand for crude oil, further exacerbating concerns about China's economic health.
Compounding the issue, additional data released last Thursday highlighted a loss of momentum in China's economy in July. New home prices fell at the fastest pace in nine years, industrial output slowed, and unemployment figures rose, painting a bleak picture for the nation's economic outlook. The slowdown has raised alarms among traders about a potential slump in demand from China, where refineries have already implemented sharp cuts to crude processing rates in response to the tepid fuel demand.
On the geopolitical front, U.S. Secretary of State Antony Blinken arrived in Tel Aviv on Sunday as part of his continued efforts to mediate a ceasefire in Gaza. However, Hamas has cast doubt on the effectiveness of his mission, accusing Israel of undermining mediation efforts. The conflict in the Middle East, along with the ongoing hostilities between Russia and Ukraine, remains a significant factor underpinning oil prices, as the potential for further escalation poses risks to global oil supply.
Despite these geopolitical concerns, pressure on oil prices could intensify, particularly as China's economic struggles persist. The country's customs administration reported a sharp decline in gasoline exports in July, falling by more than 35% due to weaker profit margins in the refining sector. China exported 790,000 tons of gasoline in July, down from 1.22 million tons in the same month last year and also below the 930,000 tons exported in June, according to customs data.
As the market continues to navigate these complex dynamics, analysts expect near-term volatility to remain elevated. "The longevity of the geopolitical risk premium hinges on whether there is a realized impact to the demand-supply balance," noted Han Zhong Liang, an investment strategist at Standard Chartered, speaking to Bloomberg. With multiple factors in play, the direction of oil prices in the coming weeks remains uncertain, though the balance of risks appears to be tilting towards further pressure on prices as China's demand outlook dims.
