Oil prices declined on Tuesday, weighed down by concerns over a slowing Chinese economy, despite increasing expectations that the U.S. Federal Reserve could begin cutting its key interest rate as early as September.
At 11:09 a.m. ET (1509 GMT), Brent futures fell by 82 cents, or 1%, to $84.03 per barrel, while U.S. West Texas Intermediate (WTI) crude dropped 94 cents, or 1.1%, to $80.97.
Dennis Kissler, senior vice president of trading at BOK Financial, commented, “Weaker economic data continues to flow from China as continued government support programs have been disappointing, with many of China’s refineries cutting back on weaker fuel demand.”
China, the world’s second-largest economy, grew by 4.7% in April-June, its slowest rate since the first quarter of 2023, and fell short of the 5.1% forecast in a Reuters poll. This slowdown, from the previous quarter’s 5.3% expansion, is due to a prolonged property downturn and job insecurity.
Meanwhile, the global economy is expected to experience modest growth over the next two years. The International Monetary Fund noted cooling activity in the U.S., a bottoming-out in Europe, and stronger consumption and exports for China. However, it also warned of risks to this growth trajectory.
In the U.S., Federal Reserve Chair Jerome Powell indicated on Monday that recent inflation readings “add somewhat to confidence” that the pace of price increases is returning to the central bank’s target sustainably. This was interpreted by market participants as a sign that interest rate cuts might be forthcoming. Lower interest rates reduce borrowing costs, potentially boosting economic activity and oil demand.
U.S. retail sales remained unchanged in June, showcasing consumer resilience and supporting economic growth prospects for the second quarter, easing fears of a sharp economic slowdown.
However, some analysts advised caution, noting that expected weakness in certain U.S. macroeconomic data could still indirectly impact oil demand in the near term.
Analysis:
The decline in oil prices, driven by concerns over China’s economic performance, highlights the interconnectedness of global markets. China’s slower-than-expected growth impacts not only regional demand but also global commodity markets, including oil.
Investors need to consider how fluctuations in key economies influence oil prices. The potential for U.S. interest rate cuts could offset some of the demand concerns by stimulating economic activity. Lower interest rates typically lead to increased consumer and business spending, which can drive up demand for oil.
For traders and investors, the current environment presents both risks and opportunities. Monitoring central bank policies, particularly those of the Federal Reserve, alongside economic data from major economies like China, will be crucial in making informed investment decisions.
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