Oil prices recover by 2.1% to close at $78.30/barrel

The prices of crude oil increased in response to positive demand outlook in the global commodities market this week. The price surge were seen in Brent and US West Texas intermediate after bearish trade in the past week.

Brent crude oil, which was last recorded at $80.40 on Thursday of the previous week, has failed to reach this level in the past six sessions, due to weak economic data from China, the world’s largest oil importer, and the US, the largest oil consumer.

According to data released last week, new house prices in China extended their 14-month downward trend, showing a 4.9% year-over-year decline in July.

Meanwhile, the country’s industrial production rose by 5.1% year-on-year, falling short of forecasts, while the unemployment rate exceeded expectations at 5.2%.

Additionally, weak labor market data from the US heightened concerns about economic growth and reinforced forecasts of subdued demand from China.

The US Department of Labor has revised its non-farm employment data for the 12-month period ending in March 2024. The revision indicates that employment in the US increased by 818,000 fewer jobs than previously reported during this period.

While the number of people applying for unemployment benefits for the first time in the US increased to 232,000 for the week ending August 17, the number of ongoing unemployment benefit claims rose by 4,000 to 1.86 million for the week ending August 10.

The data heightened concerns about economic growth in various countries and intensified market players’ worries about demand, suppressing prices.

On the other hand, the prospect of a cease-fire in the Middle East, home to a vast majority of global oil reserves, alleviated supply concerns in the markets, contributing to the decline in prices.

Amid these developments, Brent crude oil, which had risen to $81.92 last week, was unable to maintain those levels and ended the week at $79.10.

On Wednesday, Brent fell to $75.70 per barrel and lost 1.3% of its value on the same day.

After US Federal Reserve Chair Jerome Powell announced the need to adjust monetary policy in his speech at the Jackson Hole Economic Policy Symposium, prices ended the week at $78.30, marking a 2.1% increase indicating a recovery trend, though they remained below $80.

China’s lower-than-expected oil demand is a key focus for the market

The decline in oil prices is attributed to a combination of factors rather than a single cause, Julien Mathonniere, Oil Markets Economist at the US-based Energy Intelligence, told Anadolu.

Noting that the weak demand forecast from China is the most significant factor among these reasons, Mathonniere highlighted that China’s lower-than-expected oil demand is a major concern for the market, especially after the Organization of the Petroleum Exporting Countries (OPEC) downgraded its 2024 global demand growth forecast in response to these weak projections.

Mathonniere also noted that the reduction in gasoline and diesel production by refineries in China in July, compared to the same period last year, also influenced prices.

“Chinese refiners cut gasoline and diesel output in July compared to the same period last year, when demand for these two products should, on the contrary, be rising during the third quarter. And because this happened in China, the world’s largest oil importer, this bearish trend has revived the prospect of peak demand for transportation fuels and started to roil global prices again,” Mathonniere said.

Contrary to forecasts, no decisive growth in demand has been observed in China this year, Mathonniere said. He added that Energy Intelligence reported a year-on-year decline of 284,000 barrels per day in China’s oil demand for the second quarter, reflecting weak industrial activity and instability in the private sector.

“With Brent crude now trading October barrels, the country’s ability to live up to expectations is increasingly being questioned,” He said.

Mathonniere noted that another factor contributing to the decline is concerns over discrepancies between the reported and actual quantities in oil storage facilities, transportation, or sales transactions.

For this reason, Mathonniere explained that market participants believe either supply is being underestimated or demand is being overstated. This discrepancy creates uncertainty among market players, leading to a market reaction characterized by falling prices.

Emphasizing that the impact of renewed ceasefire negotiations in the Middle East on oil prices has been limited, Mathonniere marked that hopes for reconciliation in the region are not enough to lower the risk premium on prices.

“A bank analyst earlier this week mentioned a $4-$8 per barrel risk premium, but I disagree and think the risk premium, if any, had already melted a while ago. Middle East no longer is centre stage for oil traders, even if it will keep simmering in the background,” Mathonniere said.

– Prices are unlikely to rise significantly unless there is an increase in demand in China

Mentioning that prices are unlikely to rise unless there is an increase in China’s oil demand in the future, Mathonniere noted an intriguing theory that the market might attempt to compel OPEC to take action by driving prices down.

According to Mathonniere, this could prompt the group to halt its planned rollback of cuts in the fourth quarter. Although it may be somewhat optimistic to expect the market to force such a concerted price decline, falling prices will likely lead the group to reconsider its plans for rolling back cuts as the end of the year approaches.

Market is focusing on decision from Federal Reserve to find direction

Gaurav Sharma, an independent London-based oil market analyst, also stated that oil prices could rise if the US Federal Reserve cuts interest rates in September. He added that he believes the market is closely watching the Federal Reserve’s decisions to determine its direction.

“If an interest rate cut is announced in September, it could be price positive for crude futures. Until then market weakness may likely persist,” Sharma said.

Sharma noted that uncertainties regarding oil demand in China are putting pressure on crude oil prices and he pointed out that recent data shows a slowdown in industrial production, rising unemployment, and falling housing prices in China.

He emphasized that overcoming these challenges will be difficult, particularly as many market forecasters, including the International Energy Agency (IEA) and OPEC, predict lower Chinese demand in 2024 and 2025.

Pointing out that the impact of geopolitical developments in the Middle East on the oil market is limited, Sharma said if oil demand remains weak, geopolitics can only have a limited impact on crude prices.

“This is particularly true at the moment due to rising supplies of non-OPEC crude oil,” he concluded.