Oil prices experienced a significant decline on Friday, setting them on course for a second consecutive weekly drop. This downturn can be primarily attributed to a combination of a strong U.S. dollar and mixed economic signals that have weighed heavily on investor sentiment. As of 0035 GMT, Brent crude prices had fallen by 38 cents, or 0.5%, to settle at $84.73 per barrel. Similarly, U.S. West Texas Intermediate (WTI) crude futures decreased by 50 cents, or 0.6%, reaching $82.32 per barrel. Over the week, Brent crude saw a 0.3% decline, while WTI, despite showing marginal gains, slipped by as much as 0.2% on Friday.
The strengthening of the U.S. dollar has been a critical factor in the downward pressure on oil prices. The dollar index climbed for the second consecutive session, bolstered by stronger-than-expected data on the U.S. labor market and manufacturing sector earlier in the week. A robust dollar tends to diminish the demand for dollar-denominated oil from investors holding other currencies, thereby negatively impacting oil prices.
Additionally, the lack of concrete stimulus measures from China, the world’s largest oil importer, has further weighed on commodity markets. According to analysts from ANZ, China’s economic growth, which was reported at a slower-than-expected rate of 4.7% in the second quarter, has sparked concerns about the country’s future oil demand. This sluggish growth, combined with the absence of significant economic stimulus, has created an uncertain outlook for oil consumption in China.
Despite these bearish factors, some support for oil prices came earlier in the week when the U.S. government reported a larger-than-expected decline in weekly oil stockpiles. However, analysts from consultancy firm FGE have pointed out that broader inventory trends are more bearish than anticipated this month. They noted that crude stocks have been drawing down at a slower-than-usual pace for this time of year, and global fuel stocks rose last week, adding to the market’s oversupply concerns.
On the supply side, the OPEC+ producer group is not expected to recommend any changes to its current output policy. This includes the plan to start unwinding one layer of oil output cuts from October, as reported by three sources familiar with the matter who spoke to Reuters on Thursday. This decision reflects a cautious approach by OPEC+ amid the current market volatility and mixed economic indicators.
In other economic developments, Japan’s core inflation rate increased in June, leaving the possibility open for an interest rate hike in this major oil market. This potential policy shift adds another layer of complexity to the global oil market dynamics, as higher interest rates could affect economic growth and oil demand in Japan.
The broader market sentiment remains cautious as investors navigate through these mixed signals and uncertain future trends. While short-term supply concerns, such as the worsening wildfires in Canadian oil sands, have helped to limit the extent of the losses, the overall outlook for the oil market remains clouded by a combination of strong economic data from the U.S., sluggish economic performance in China, and ongoing inventory and supply issues.
This intricate interplay of factors has created a challenging environment for oil investors, who must carefully weigh the various influences on oil prices and market sentiment. As the market continues to respond to these developments, the path forward for oil prices remains uncertain, with potential volatility likely to persist in the coming weeks.