This year’s longest rally in oil prices has finally stalled, with both benchmarks faltering for the first time since swingeing OPEC cuts drove a market rebound.
Oil prices dropped around two per cent last week amid escalating concerns over demand in China, which is suffering from a worsening property crisis that has pushed development giant Country Garden to the brink of collapse.
China is the world’s biggest oil importer, but it reported a 20.8 per cent drop in oil imports last month compared to last year – with the country’s sluggish revival from the pandemic weighing down risk appetite from investors.
Brent Crude is now priced at $84.80 per barrel and WTI Crude at $81.25 per barrel heading into tomorrow’s trading.
Davide Petrella, portfolio manager at Moneyfarm, argued that China’s decline has also been powered by a contraction in the manufacturing sector, with the Purchasing Managers’ Index for July standing at 49.2 – below the neutral value of 50 – reflecting at gloomy short-term expectations for a sector recovery.
He believed the country’s inconsistent recovery from the pandemic exposed that the “global macroeconomic landscape remains uncertain”.
“Many analysts agree that the recent oil rally over the past 40 days is not sustainable in the medium term. While the US seems to have averted the risk of a recession, the contraction of the Chinese economy could weigh heavily on the overall global oil demand,” Petrella said.
Edward Moya, senior market analyst at OANDA, believed prices would be challenged by the latest macroeconomic developments.
He said: “Energy traders will focus on the latest problems from China, the global flash PMIs, the Jackson Hole Symposium, and the BRICS summit. After having an interrupted rally… WTI crude looks poised to consolidate around the $80 region as traders grapple with a tight market that is facing headwinds from world’s two largest economies.”
The latest dip brought a multi-week rally – which saw prices rise on the Brent and WTI benchmarks 18 and 20 per cent over seven straight weeks since June – to an end.
Investor sentiment towards oil rose in line with expectations of tightening markets, with OPEC and its allies including Russia (OPEC+) confirming slashing global output by more than five per cent through a series of pledged cuts since last winter.
But it now remains to be seen which competing factors will influence prices in this week’s trading sessions – with oil also facing challenges from seasonal demand weakness heading into autumn and further interest rate hikes from the US Federal Reserve.