Oil prices slipped on Tuesday amid concerns about a slowing Chinese economy and its potential impact on energy demand. However, the growing consensus that the U.S. Federal Reserve will start cutting its key interest rate as soon as September limited the declines.
Brent crude futures fell 21 cents, or 0.25 percent, to $84.64 per barrel by 0408 GMT, while U.S. West Texas Intermediate (WTI) crude dropped 25 cents, or 0.31 percent, to $81.66.
Concerns over Chinese demand outlook
IG market strategist Yeap Jun Rong said in an email that the weaker Chinese economic data “cast some doubts on whether market participants are being overly optimistic around Chinese oil demand outlook.” China, the world’s second-largest economy, grew 4.7 percent in the April-June period, its slowest pace since the first quarter of 2023 and missing a 5.1 percent forecast in a Reuters poll. The growth also slowed from the previous quarter’s 5.3 percent expansion, hampered by a protracted property downturn and job insecurity.
“Its Q2 GDP and retail sales figures had surprised on the downside by a significant margin, while anticipation for stronger stimulus measures at the Third Plenum may face the risks of disappointment,” Yeap added, referring to a key economic leadership meeting in Beijing this week.
Potential Fed interest rate cuts
In the U.S., Federal Reserve Chair Jerome Powell said on Monday that the three U.S. inflation readings over the second quarter of this year “add somewhat to confidence” that the pace of price increases is returning to the central bank’s target in a sustainable fashion, remarks that market participants interpreted as indicating a turn to interest rate cuts may not be far off.
Lower interest rates decrease the cost of borrowing, which can boost economic activity and oil demand. According to CME FedWatch Tool, key U.S. economic data has started to show signs of softness, which could quicken the Fed’s decision on monetary policy easing, with cuts likely in September and December, said OANDA senior market analyst Kelvin Wong in a client note.
Read more: Oil prices steady amid strengthening dollar, concerns over weakening demand in China
Impacts on oil supply
On the supply side, while the crisis in the Middle East has not impacted supply, attacks on ships in the Red Sea have forced vessels to take longer routes, meaning oil remains on the water for longer.
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