Oil down nearly 2% — again — as rally disrupted by China gloom

Investing.com -- Just when OPEC thought it had it all, it appears it didn’t.

Crude prices were down 2% for a second session in a row Monday after China’s economic growth again lagged expectations, raising questions on whether demand for oil will actually hit record highs this year if the top importer of the commodity remains in its current flux.

A partial restart of halted Libyan output also added to the dour mood among crude longs, Reuters reported.

New York-based West Texas Intermediate, or WTI, crude settled down $1.27, or 1.7%, at $74.15 per barrel for its weakest closing price since July 10.

London-based Brent settled down $1.37, or 1.7%, at $78.50, also for its poorest finish in a week.

Prior to this week, oil markets had been riding a bullish wave on the back of a dollar that sank to 15-month lows after U.S. interest rate expectations were softened by a retreat in inflation. Non-stop rhetoric — more than proof — of the Saudis doubling down on production cuts, supposedly with Russian assistance this time, put more wind in the sails of crude longs.

Friday was the first time the party came to a meaningful halt, as crude prices dropped some 2% after some players took profit on an 8% advance over the past three weeks. There was also talk that China’s second-quarter gross domestic product data, due Monday, would be unsupportive to oil’s winning streak.

That data showed Chinese GDP growth didn’t just contract from the first quarter but also grew at a slower-than-expected pace from the prior year, as its biggest drivers - manufacturing and real estate activity - remained under pressure.

“Oil won’t catch a bid unless China finally unleashes [a] meaningful stimulus that propels large parts of the economy,” said Ed Moya, analyst at online trading platform OANDA.

“Little rate cuts here and there, along with support for property markets won’t do the trick for revitalizing the China recovery trade,” added Moya. “If China doesn’t appear strong the global growth outlook will get slashed and that could keep oil prices heavy a while longer.”

After a strong start to the year following the dismantling of tough COVID-19 measures, the Chinese economy has been struggling with weak demand at home and abroad and a protracted slump in the country's property market, traditionally a significant growth driver.

That could be a challenge to longs in crude and oil producing countries in the Saudi-led OPEC, or the Organization of the Petroleum Exporting Countries, who had hoped for a long and hard summer rally. Doubts are beginning to grow now that global crude demand will be driven to record highs this year by a China determined to rebound at all costs, including using rate cuts to spur growth.

The odd thing is not all Chinese growth data now is bad.

China’s apparent petroleum demand—refinery runs plus net oil product imports—was up 25% and 17% year over year in April and May respectively, according to figures from data provider CEIC. Diesel production in May was 26% higher than a year earlier, and a full 40% higher than in May 2019 before the pandemic hit.

Given how bad things are right now in China’s property sector, that is an astonishing figure. Property investment in May was 21% lower than in May 2022. At the same time, highway transport remains lackluster. Freight turnover is still below late 2019 levels, and highway passenger transport turnover, in person-kilometer terms, is still less than half pre-pandemic levels. Domestic air traffic has recovered more rapidly but, as a portion of China’s total petroleum consumption, jet fuel remains small relative to diesel and gasoline.

The Wall Street Journal, in studying this recently, offered several possible explanations for the phenomenon but concluded that the simplest would be that Chinese refiners and regulators — like much of the world — misjudged both the strength of China’s recovery and the global energy market.

Said John Kilduff, partner at New York energy hedge fund Again Capital:

“If you want to sustain this oil rally, you’re going to need the Chinese. Traditionally, they account for more than 20% of global oil demand.”

“You can’t cut your way to prosperity; that’s my message to OPEC. As much as oil bulls think any loss of demand can be made up with fewer barrels, the comfort level the market takes with demand is always greater. Tight oil is fantastic, if you can maintain it, yes. But you saw what happened after the Ukraine invasion; how quickly we lost that $140 a barrel despite OPEC trying to manage production month after month with cuts.”

In recent months, OPEC+, an extension of the cartel that includes 10 non-members led by Russia, has been slashing almost five million barrels per day in output, or about 5% of world demand. Despite the arduous effort, largely contributed by Saudi Arabia, oil has languished at under $80 a barrel for months, compared to the 14-year highs of around $140 a barrel reached in the aftermath of the Russian invasion of Ukraine in March 2022.

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