Oil prices began the week on a downward trajectory, retreating from recent highs as weak economic data from China and anticipation of the Federal Reserve's rate decision weighed on the market. Brent crude futures fell by 0.71% to $73.96 per barrel by midday Monday, while U.S. West Texas Intermediate crude dropped 0.91% to $70.64. Both benchmarks had recently hit their highest levels in weeks, buoyed by a 6% rally last week.
China's disappointing retail sales data and slightly improved industrial output have raised concerns about the health of the world's largest oil importer. Despite Beijing's ongoing efforts to stimulate the economy, consumer spending remains sluggish. UBS analyst Giovanni Staunovo noted that "risk-off sentiment following weaker-than-expected Chinese economic data is weighing on crude prices." He added that traders are waiting for clear guidance from Chinese officials on potential stimulus measures.
China's oil demand has been contracting, exacerbated by seasonal maintenance at key refining plants. November saw crude processing fall to its lowest level in five months, at around 14.3 million barrels per day, according to ING Commodities. Domestic oil demand also declined, dropping 2.1% year-on-year, further fueling fears of oversupply in the coming year.
OPEC+ has responded to these uncertainties by delaying planned output increases until April, reflecting caution amid fragile global demand. John Evans of oil brokerage PVM commented, "Whatever stimulus is being deployed, consumers are not buying into it. Without a serious sea-change in personal spending behavior, China's economic fortunes will remain stunted."
Adding to the mix is the Federal Reserve's upcoming policy meeting, which is widely expected to result in a 25-basis-point rate cut. Lower interest rates typically weaken the dollar, which can benefit commodities like oil by making them cheaper for holders of other currencies. Additionally, reduced borrowing costs can stimulate economic growth, indirectly boosting oil demand.
Tony Sycamore, an analyst at IG Markets, described the decline in oil prices as light profit-taking ahead of the Fed's decision. He said that many banks and funds are likely to have closed their books, given the reduced appetite for risk during the holiday season.
Beyond China and the Fed, geopolitical factors are also influencing oil markets. U.S. Treasury Secretary Janet Yellen hinted at the possibility of new sanctions targeting "dark fleet" tankers and Chinese banks, aiming to curb oil revenues supporting Russia amid its ongoing war in Ukraine. Additionally, the incoming Trump administration is expected to intensify pressure on Iran, further tightening global oil supplies.
In parallel, Chinese refiners face growing challenges. According to Mysteel OilChem, five state-owned plants, including Sinopec Fujian Refining & Chemical Co., shut down for seasonal maintenance in November, limiting refining capacity. These shutdowns, combined with declining apparent domestic demand, are contributing to a bearish outlook for the oil market.
Despite these headwinds, oil price declines were cushioned by fears of potential supply disruptions linked to sanctions and geopolitical tensions. Fresh U.S. sanctions on entities trading Iranian oil have already driven prices for Iranian crude sold to China to multi-year highs.
