This week, crude oil prices increased due to a positive demand outlook in global markets. After a weak showing last week, both Brent and US West Texas Intermediate (WTI) crude oil saw price hikes. However, uncertainty about demand from big markets like China and the US continues to create doubts about how long this rise will last.
Brent crude, which reached $80.40 last Thursday, hasn’t returned to that level in the past six trading days. Economic issues in China, the world’s largest oil importer, and the US, the biggest oil consumer, are keeping prices down.
China’s Economic Woes Affect Oil Demand
China’s economy is under pressure, and that’s impacting oil demand. New house prices in the country have been falling for 14 straight months, with a 4.9% drop in July. Industrial production rose by 5.1%, but this was below expectations. On top of that, the unemployment rate hit 5.2%, which is worse than predicted.
In the US, labor market data didn’t look much better. A recent revision by the Department of Labor shows 818,000 fewer jobs were created in the 12 months leading up to March 2024 than previously thought. Unemployment claims also rose, with initial claims hitting 232,000 for the week ending August 17, and ongoing claims rising by 4,000 to 1.86 million for the week ending August 10.
Geopolitical tensions in the Middle East, a major oil-producing region, have somewhat eased, which briefly helped with price stability. However, Brent crude, which hit $81.92 last week, dropped to $79.10 and continued to fall, hitting $75.70 per barrel mid-week.
Some relief came when US Federal Reserve Chair Jerome Powell hinted at potential changes to monetary policy at the Jackson Hole Economic Policy Symposium. This sparked a recovery, with Brent prices climbing to $78.30 by the end of the week, though they remained below the $80 mark.
China’s Weak Oil Demand is a Major Concern
According to Julien Mathonniere, an oil market economist at Energy Intelligence, China’s weak demand for oil is the biggest factor affecting prices. OPEC (the Organization of the Petroleum Exporting Countries) recently lowered its global demand growth forecast for 2024 due to China’s economic slowdown.
“China’s oil demand has been much lower than expected this year, and that’s a major worry for the market,” Mathonniere said. He explained that Chinese refineries reduced their gasoline and diesel production in July compared to last year, a time when demand for transportation fuels usually goes up.
Energy Intelligence also reported that China’s oil demand dropped by 284,000 barrels per day in the second quarter, reflecting lower industrial activity and uncertainty in the private sector. Mathonniere added that there are concerns about discrepancies between reported oil supplies and actual usage, causing further market uncertainty.
Will Oil Prices Rebound?
For oil prices to go up significantly, China’s oil demand needs to recover. Some experts believe that the market might try to push OPEC to act by driving prices lower, possibly forcing the group to reconsider its planned rollback of production cuts.
Gaurav Sharma, an independent oil market analyst in London, suggested that oil prices could rise if the US Federal Reserve cuts interest rates in September. “An interest rate cut could be good news for oil prices,” he said. However, until that happens, market weakness is likely to continue.
Sharma also noted that China’s economic slowdown, rising unemployment, and falling housing prices are putting pressure on global oil demand. Many forecasters, including the International Energy Agency (IEA) and OPEC, predict that China’s demand will remain low in 2024 and 2025.
The oil market is in a tricky spot. Economic problems in China and the US, along with ongoing uncertainty about demand, mean that prices are likely to remain unstable. Traders are watching for any signals of improvement, especially from China, and waiting to see how OPEC and the US Federal Reserve respond.
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