Oil Prices Struggle Amid Weak Chinese Demand and Global Tensions
The global oil market is experiencing significant volatility due to weak demand from China, geopolitical tensions in the Middle East, and shifts in production strategies.
Published July 28, 2024 - 00:07am
The price of Kuwaiti oil surged by 86 cents to reach $83.47 per barrel in Friday's trading, compared to $82.61 the day before, according to the Kuwait Petroleum Corporation. In contrast, global oil futures saw declines, with Brent crude closing down $1.24 at $81.13 per barrel and West Texas Intermediate (WTI) falling $1.12 to $77.16 per barrel.
This drop in oil futures, approximately 1.5%, concluded a week marked by declining prices influenced by reduced Chinese demand and hopes for a ceasefire agreement in Gaza. Such an agreement could alleviate tensions in the Middle East and the associated supply concerns. Data from the previous week showed a significant 11% reduction in China's fuel oil imports during the first half of 2024, raising alarms about future oil demand in the country.
Reports indicate that several factors, including Chinese demand concerns and macroeconomic uncertainties, have significantly pressured oil prices. Despite events that might typically boost market sentiment, such as wildfires in Canada, declining U.S. oil inventories, and better-than-expected U.S. GDP figures, these signals have largely gone unnoticed due to a broad tech stock sell-off and dissatisfaction with China's commodity market.
According to the international oil price report by 'Oil Price', the largest producers in the OPEC+ alliance, including Iraq, Kazakhstan, and Russia, have submitted their compensation plans to reduce production by 2.284 million barrels per day until September 2025. These measures aim to balance the market amidst volatile conditions. Additionally, traders are weighing the impact of weak Chinese demand against dwindling U.S. inventories, with WTI stabilizing around $77 per barrel. This scenario culminated in the most significant weekly drop since early May.
Market watchers remain divided on whether OPEC+ will ease its production cutbacks in the upcoming quarter. A critical session of the Joint Ministerial Monitoring Committee (JMMC) is anticipated in early August, where key decisions will be made.
American refineries are also preparing to reduce output with the summer vacation season ending in early September. Market participants expect that this will further affect crude demand, compounding the downward pressure on oil prices.
Adding to these dynamics, hopes for a ceasefire in Gaza have influenced market sentiment. Talks of a six-week ceasefire agreement in exchange for the release of hostages by Hamas have been progressing. U.S. officials believe the parties involved are closer than ever to an agreement.
Economic considerations in the United States are also in focus, with discussions on how potential changes in U.S. political leadership might impact the oil market. A recent report by 'Citi' suggests that a Trump administration could drive oil prices lower due to supportive sector policies and pressures on OPEC to increase output. Contrarily, a Biden or Harris administration might maintain or tighten current policies.
According to George Khoury, head of research at CFA, the initial positive impact from strong U.S. GDP growth figures was mitigated by concerns over declining Chinese oil demand. Data from CIBC Private Wealth underscored the need for a positive catalyst in the market, as U.S. inventory declines alone were insufficient to sustain oil prices.
With the oil market experiencing its third consecutive week of declines, Brent crude fell by approximately 1.8%, while WTI saw a larger drop of about 3.7%. This trend aligns with rising oil and gas drilling activities in the U.S., as reported by Baker Hughes.
Furthermore, geopolitical tensions, particularly in the Middle East, continue to pose risks. The intricate dynamics in Gaza, the West Bank, Lebanon, Syria, and Yemen, coupled with ongoing negotiations and potential for conflict escalation, keep the market on edge. Citadel warns that while the summer hurricane season is winding down, weather, cyber, and geopolitical risks remain critical factors for market participants.