Oil prices experienced a decline on Tuesday as China’s reduction in benchmark lending rates failed to meet some analysts’ expectations, raising concerns about the demand for oil in the world’s largest crude importer.
At 0310 GMT, Brent crude dipped by 5 cents to reach $76.04 per barrel, while U.S. West Texas Intermediate (WTI) crude for July decreased by 99 cents from the previous close, settling at $70.79. The July contract is set to expire by the end of Tuesday’s trading session.
The more active WTI crude contract for August delivery dropped 71 cents to $71.22 per barrel, compared to the previous Friday’s figures. The absence of a settlement in the WTI contract on Monday was due to a public holiday in the United States.
China implemented a 10-basis-point reduction in two benchmark lending rates—the one-year loan prime rate (LPR) and the five-year LPR—on Tuesday. However, these cuts, the first in 10 months, were less aggressive than anticipated. A Reuters poll showed that 50% of respondents expected a 15-basis-point cut to the five-year LPR.
According to Tina Teng, a markets analyst at CMC Markets in Auckland, “The rate cuts… were widely expected, hence it did not offer a bullish push to the oil markets.” Teng added, “Oil traders may need to witness a substantial economic rebound in China to improve their outlook on oil demand.”
The rate reductions follow recent economic data revealing that China’s retail and factory sectors are struggling to maintain the earlier year’s momentum.
Last week, the Chinese government convened to discuss measures aimed at stimulating economic growth, and several major banks have revised down their 2023 economic growth forecasts for China, expressing concerns about the country’s post-COVID recovery faltering.
On Monday, two policymakers at the European Central Bank advocated for more rate hikes in response to the risks of higher inflation. Market participants are also awaiting testimony from U.S. Federal Reserve Chair Jerome Powell later in the week, seeking clues about future interest rate adjustments.
Increased interest rates typically curb spending appetite and can subsequently reduce oil demand.
Regarding the supply side, Iran’s crude exports and oil output have reached new highs in 2023 despite the presence of U.S. sanctions. Russia is also expected to boost seaborne diesel and gasoil exports this month, outweighing the cuts made by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Moscow itself.
JPMorgan analysts commented, “Supply has rebounded and surprised to the upside from a number of sources: U.S., other non-OPEC, not to mention within OPEC+ e.g. Nigeria, Iran, Venezuela.” The bank revised its average price estimate for Brent to $81 per barrel this year, down from the earlier projection of $90.
According to the JPMorgan analysts, even if the OPEC+ cuts are extended to 2024, they will not be sufficient to bring global supply and demand into balance.
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