Oil prices witnessed a significant drop, reaching a four-week low on Wednesday, following the release of disappointing manufacturing data from China. As the world’s largest importer of crude oil, China’s weak economic indicators raised concerns about the growth of demand in the latter half of the year.
The surge in the value of the dollar, driven by expectations of another interest rate hike by the Federal Reserve in June, further burdened crude futures, which are priced in US currency.
The Dollar Index, which monitors six other major currencies, hit a two-month high, causing dollar-denominated crude oil to become more expensive for buyers using other currencies.
The New York-traded West Texas Intermediate (WTI) crude settled at $68.09 per barrel, experiencing a decline of $1.37 or 2%. The US crude benchmark reached a four-week low of $67.07 during the trading session.
Similarly, London-traded Brent crude settled at $72.66, down by 88 cents or 1.2%. The global benchmark for oil hit a four-week low of $71.53 earlier.
Although oil prices rebounded slightly, market participants eagerly awaited the weekly US oil inventory data, which would be released by the American Petroleum Institute (API) after the market’s closure.
At approximately 16:30 ET (20:30 GMT), the API would provide an overview of closing balances for US crude, gasoline, and distillates for the week ending on May 26. These figures serve as a preliminary indicator before the official inventory data is released by the US Energy Information Administration on Wednesday.
Analysts tracked by Investing.com anticipate a 1.1 million barrel drop in crude stockpiles for the previous week. In comparison, a substantial 12.5 million barrel reduction was reported during the week ending on May 19.
Regarding gasoline inventories, it is expected that a draw of 0.369 million barrels will be reported, following a decline of 2.053 million barrels in the previous week. Gasoline stands as the leading fuel product in the United States.
As for distillate stockpiles, the forecast suggests a decrease of 0.118 million barrels compared to a deficit of 0.562 million barrels in the prior week. Distillates are refined into heating oil, diesel for transportation, and fuel for jets, ships, trains, and buses.
The decline in oil prices was triggered by data from Beijing indicating that China’s manufacturing sector, a crucial driver of regional growth, contracted for the second consecutive month in May.
This development raised concerns about a slowdown in oil demand within the world’s second-largest economy, which was previously expected to contribute significantly to record-high oil demand following the lifting of severe COVID-19 restrictions.
With China’s lackluster economic recovery and the Federal Reserve’s tighter monetary policy, oil prices have plummeted by over 16% since the beginning of the year.
The dampened demand outlook has been influenced by the Fed’s decision to combat inflation by raising interest rates by 500 basis points (5%) over the past 16 months, reaching a peak of 525 basis points (5.25%).
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