Oil Prices Decline on Chinese Economic Concerns

Oil prices slipped on Tuesday due to worries about a slowing Chinese economy crimping demand. However, the growing consensus that the U.S. Federal Reserve will begin cutting its key interest rate as soon as September limited the declines.

Brent futures fell 21 cents, or 0.25%, to $84.64 a barrel by 0408 GMT, while U.S. West Texas Intermediate (WTI) crude dropped 25 cents, or 0.31%, to $81.66.

Chinese Economic Data Affecting Oil Prices:

In an email, IG market strategist Yeap Jun Rong said that the weaker run in Chinese economic data “cast some doubts on whether market participants are being overly optimistic around Chinese oil demand outlook.”

The world’s second-largest economy grew 4.7% in April-June, its slowest since the first quarter of 2023 and missing a 5.1% forecast in a Reuters poll. It also slowed from the previous quarter’s 5.3% expansion, hamstrung by a protracted property downturn and job insecurity.

“Its 2Q GDP and retail sales figures had surprised on the downside by a significant margin, while anticipation for stronger stimulus measures at the Third Plenum may face the risks of disappointment,” Yeap added, referring to a key economic leadership meeting in Beijing this week.

U.S. Federal Reserve and Interest Rates:

In the U.S., Fed Chair Jerome Powell said on Monday that the three U.S. inflation readings over the second quarter of this year “add somewhat to confidence” that the pace of price increases is returning to the central bank’s target sustainably.

Market participants interpreted these remarks as indicating that a turn to interest rate cuts may not be far off. Lower interest rates decrease the cost of borrowing, which can boost economic activity and oil demand.

OANDA senior market analyst Kelvin Wong said in a client note that key U.S. economic data has started to show signs of softness, which could quicken the Fed’s decision on monetary policy easing. According to the CME FedWatch Tool, cuts are likely in September and December.

Supply Side Concerns:

On the supply side, Houthi fighters in Yemen, responding to Israel’s bombardment of Gaza, targeted three vessels, including an oil tanker, in the Red and Mediterranean seas with ballistic missiles, drones, and booby-trapped boats, they said on Monday.

While the crisis in the Middle East has not impacted supply, attacks on ships in the Red Sea have forced vessels to take longer routes, meaning oil remains on the water for longer.