Oil prices experienced a slight decline on Tuesday, following disappointing economic reports from China that impacted market sentiment. Traders were also on edge with a U.S. Federal Reserve policy meeting approaching later this week.
As of 20:41 ET (01:42 GMT), Brent Oil Futures decreased by 0.2 percent, settling at $73.81 per barrel, while Crude Oil WTI Futures fell 0.1 percent to $70.20 per barrel. Both contracts, which are set to expire in February, saw a drop on Monday as concerns over sluggish demand were amplified by the weak data from China.
Weak Chinese data clouds demand outlook
On Monday, China released significant economic indicators for November, painting a mixed picture. Industrial output rose as anticipated, slightly exceeding October’s growth and suggesting some improvement in the industrial sector. However, retail sales growth sharply slowed in November, falling short of expectations and revealing ongoing weaknesses in consumer spending. Additionally, home prices dropped by 5.7 percent year-over-year in November, following a 5.9 percent decline in October, underscoring persistent issues in the real estate market.
These developments raise alarms for the oil market, especially given that China is the largest crude importer globally. The slowdown in retail sales points to fragile domestic demand, which could weaken energy consumption. Moreover, the modest rise in industrial output indicates that manufacturing activities are not robust enough to significantly enhance oil demand. Last week, Beijing also provided lackluster signals regarding new stimulus measures.
Markets cautiously await Fed rate decision
Investors are largely on edge ahead of this week’s Fed meeting, where a rate cut of 25 basis points is widely anticipated, accompanied by indications of a slower pace of reductions in 2025. Typically, lower interest rates are seen as supportive of economic growth, which could, in turn, boost oil demand. However, uncertainty surrounding the Fed’s future policy direction has introduced a level of hesitation in the markets. This cautious sentiment is contributing to the current softness in oil prices, as traders await clearer indications from the central bank’s forthcoming gathering.
Following strong gains last week, oil prices have faced downward pressure this week. The potential tightening of oil markets due to stricter U.S. sanctions on Russia, along with expectations of new stimulus measures from China, had previously supported oil prices.
Read more: Crude oil prices dip amid cautious market sentiment and Fed meeting
Decline amid market caution
On Monday, oil prices eased as market caution persisted. Brent Oil Futures for February fell by 0.3 percent to $74.28 per barrel, while Crude Oil WTI Futures dropped by 0.4 percent to $70.56 per barrel by 20:35 ET (01:35 GMT). Both contracts retreated after achieving significant gains last week, as U.S. officials hinted at the possibility of additional oil sanctions against Russia, a move that could considerably tighten markets in the upcoming year.
Nevertheless, oil prices remain under pressure from concerns about sluggish demand.
Mixed signals from China’s economy
China, the world’s largest oil importer, reported that its industrial production in November met expectations and slightly outperformed last year’s growth, supported by the country’s stimulus measures. However, retail sales were sharply lower than anticipated, reflecting continued weakness in private spending. Other data indicated that China’s unemployment rate remained steady at 5 percent. The deceleration of China’s economy is a critical concern for oil traders, as the country has historically been a significant driver of global oil consumption.
Oversupply fears highlighted by IEA
Last week, the International Energy Agency (IEA) noted a contraction in China’s oil demand, heightening fears of oversupply in the coming year. A key meeting on Chinese economic policy concluded last week without any substantial indications of new stimulus plans. Prices had surged sharply last week in anticipation of more stimulus measures from China’s Central Economic Work Conference (CEWC), but the outcomes from the meeting did not provide signals for any immediate, bold economic enhancements.
Market sentiment and supply outlook
The IEA maintained its forecast that the oil market will remain adequately supplied, despite a slight increase in its demand forecast for the next year. The Organization of the Petroleum Exporting Countries (OPEC) recently lowered its forecasts for oil demand growth in 2024 and 2025, marking its fifth consecutive reduction. The cartel has also continued its trend of supply cuts. Collectively, these factors have intensified bearish sentiment, as the risks of oversupply coincide with diminishing demand expectations.
