Oil Prices Decline as Investor Confidence in China Weakens

06 Sep, 2023

Oil Prices Decline as Investor Confidence in China Weakens

Oil prices experienced a decline on Tuesday, primarily influenced by concerning data regarding China's post-pandemic economic recovery. Despite this, the anticipation of OPEC+ producers extending supply cuts helped mitigate the losses.

China, the second-largest global economy, plays a pivotal role in bolstering oil demand for the remainder of the year. The sluggish economic performance in China has left markets disappointed, as previously pledged stimulus measures have fallen short of expectations. A private-sector survey conducted on Tuesday revealed that China's service sector grew at its slowest rate in eight months in August, primarily due to persistent weak demand in the world's largest oil-importing nation.

Analysts noted that the market had already factored in China's recent efforts to stimulate its economy, which counterbalanced the support from anticipated oil supply reductions. Additionally, European data added to the bleak economic outlook. A survey indicated a more substantial than expected decline in business activity in the eurozone in the previous month, with the dominant services industry contracting, raising concerns about the region slipping into a recession.

In the United Kingdom, a survey revealed a decrease in service activity in August, marking the first decline since January. This downturn was attributed to higher interest rates, which reduced both consumer and corporate demand. In Japan, the world's third-largest economy, household spending in July fell by 5.0% compared to the previous year, surpassing the forecasted decline of 2.5%. This marked the fifth consecutive month of declines.

Market watchers are closely monitoring U.S. economic data scheduled for release later on Tuesday to discern whether the Federal Reserve will continue its aggressive interest rate hike campaign. Saudi Arabia is widely expected to extend its voluntary oil cuts into October, while Russia is set to unveil a new OPEC+ supply cut agreement this week, as indicated by its deputy prime minister. Moscow has already declared a 300,000 barrels per day (bpd) reduction in exports for September, following a 500,000 bpd cut in August. Riyadh is also expected to maintain its voluntary 1 million bpd cut into October.

"Considering market expectations, it is improbable that these two producers will deviate from an extension and risk triggering a market sell-off," commented analysts from ING.