1/17/2024

Oil falls due to weakness of Chinese economy

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Key points:

  • Oil prices fell 0.7% and 0.8% per barrel for Brent and WTI, respectively.
  • The impact was caused by disappointing economic growth data from China, the world’s second largest oil consumer.
  • Ongoing conflicts in the Red Sea support concerns about oil supplies.

Crude oil prices dipped on Wednesday as tepid economic growth in China, the world’s second-largest oil consumer, dampened demand expectations. The robust dollar further discouraged risk-taking, eroding investor appetite for oil.

Benchmark Brent crude futures retreated 58 cents, or 0.7%, to settle at $77.71 per barrel. U.S. West Texas Intermediate (WTI) crude futures slid 61 cents, or 0.8%, to close at $71.79 per barrel.

A marginal rise in Brent futures overnight was overshadowed by lingering concerns over the Red Sea, where naval and air skirmishes continued to raise the specter of supply disruptions.

The recent US airstrikes against Houthi rebels in Yemen amplified these fears. Although oil market indicators have not fully captured the tensions in the Red Sea, the actual price of oil and petroleum products for consumers has already inched higher due to disruptions to trade routes through the Red Sea and the Suez Canal.

China showed weaker economic results than expected

China’s economic expansion in the final quarter of 2023 faltered beneath analysts’ forecasts, raising questions about the prospects of a robust Chinese demand driving higher global oil consumption in 2024.

The tepid growth performance fails to alleviate the headwinds facing crude oil demand, and the country’s outlook for the immediate future remains uncertain.

“The oil industry has supported the idea that, despite the bumpy recovery, oil demand from China remains resilient and is likely to reach record levels in 2024.”

said Priyanka Sachdeva, senior market analyst at Phillip Nova.

Despite the slowdown in economic growth, Chinese refineries’ output surged 9.3% in 2023, reaching a record high, suggesting that the country’s oil demand remains resilient.

Dollar influence

In a separate development, the US dollar held near its monthly high on Wednesday as comments from Federal Reserve officials tempered expectations of a rapid pace of interest rate reductions. A stronger dollar makes dollar-denominated oil less attractive to buyers using other currencies.

Analysts warned that higher interest rates could further dampen oil demand as economic activity typically slows down in such an environment, leaving oil prices vulnerable to downward pressures.

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