Oil prices eased on Thursday as concerns over weak demand in China, the world’s largest crude importer, and expectations of a nearing ceasefire deal in the Middle East outweighed gains from the previous session driven by draws in U.S. inventories.
Brent crude futures for September fell 63 cents, or 0.8%, to $81.08 a barrel by 0355 GMT. Similarly, U.S. West Texas Intermediate (WTI) crude for September slipped 63 cents, or 0.8%, to $76.96 per barrel. This decline followed a brief respite on Wednesday when both benchmarks snapped consecutive sessions of declines after the Energy Information Administration (EIA) reported that U.S. crude inventories had fallen by 3.7 million barrels last week. This draw was significantly higher than the analysts’ expectations of a 1.6-million-barrel draw. U.S. gasoline stocks also dropped by 5.6 million barrels, compared to analysts’ expectations of a 400,000-barrel draw, while distillate stockpiles fell by 2.8 million barrels against an expected increase of 250,000 barrels.
“Despite draws in U.S. crude and gasoline stocks, investors remained wary about weakening demand in China and expectations of advancing ceasefire talks between Israel and Hamas added to pressure,” said Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.
This year, China’s oil imports and refinery runs have been lower than in 2023 due to weaker fuel demand amid sluggish economic growth, according to government data. The slumping U.S. stock markets also reduced traders’ risk appetite, Kikukawa added, with all three main indexes on Wall Street ending lower on Wednesday.
In the Middle East, efforts to reach a ceasefire deal to end the conflict in the Gaza Strip between Israel and the militant group Hamas, under a plan outlined by U.S. President Joe Biden in May and mediated by Egypt and Qatar, have gained momentum over the past month. On Wednesday, Israeli Prime Minister Benjamin Netanyahu outlined a vague plan for a “deradicalized” post-war Gaza in a speech to the U.S. Congress and touted a potential future alliance between Israel and America’s Arab allies.
“If Middle East ceasefire talks progress, U.S. equities continue to slide, and China’s economy remains sluggish, oil prices could fall to early June levels,” said Satoru Yoshida, a commodity analyst with Rakuten Securities.
Additionally, clarity on U.S. interest rate cuts is missing, noted Phillip Nova analyst Priyanka Sachdeva, who does not expect robust demand given China’s poor economic recovery. The U.S. Federal Reserve is expected to cut rates only twice this year, in September and December, according to a Reuters poll of economists. This cautious approach is due to resilient U.S. consumer demand despite easing inflation. Lower interest rates are typically expected to spur economic growth, leading to increased oil consumption.
The overall picture for oil prices remains mixed. While the significant draws in U.S. inventories provided a temporary boost to prices, broader concerns over weakening demand in China and potential geopolitical developments in the Middle East have tempered market optimism. China’s economic indicators have been showing signs of a slowdown, with oil imports and refinery runs declining. This trend is a key concern for global oil markets, given China’s position as the largest crude importer.
The geopolitical situation in the Middle East is another critical factor. The ongoing conflict in Gaza and the potential for a ceasefire deal could significantly impact oil prices. Any progress in ceasefire talks could lead to a reduction in geopolitical risk premiums, further weighing on oil prices. Israeli Prime Minister Netanyahu’s speech to the U.S. Congress, where he discussed a potential alliance between Israel and Arab allies, adds another layer of complexity to the situation.
Moreover, the state of the U.S. economy and the Federal Reserve’s monetary policy are crucial factors influencing oil prices. While the Fed is expected to cut interest rates twice this year, the exact timing and extent of these cuts remain uncertain. The resilient U.S. consumer demand has so far justified a cautious approach from the Fed, but any signs of economic slowdown could prompt more aggressive rate cuts, potentially boosting oil demand.
In summary, while the immediate impact of U.S. inventory draws provided some support to oil prices, the market remains overshadowed by concerns over Chinese demand and geopolitical developments in the Middle East. The interplay of these factors will likely continue to drive oil price movements in the coming weeks, with investors keeping a close eye on economic data and geopolitical news.