Oil prices extended their decline for a third consecutive day on Wednesday, as weaker-than-expected economic data from China raised concerns about the outlook for oil demand in the world’s second-largest consumer. Investors also weighed the impact of a larger-than-forecast drop in US crude inventories and the prospect of further interest rate hikes by the Federal Reserve.
China’s Economic Slowdown Weighs on Oil Market Sentiment
The oil market was under pressure from the start of the week, after China reported disappointing retail sales and industrial production figures for July, indicating a slowdown in its economic recovery from the pandemic. China’s crude oil imports also fell to their lowest level since May 2020, as the country grappled with a resurgence of Covid-19 cases and tightened environmental regulations.
China is the largest importer of crude oil in the world, accounting for about 14% of global demand. Any signs of weakness in its oil consumption could have a significant impact on the balance between supply and demand in the oil market, especially as the Delta variant of the coronavirus threatens to derail the global recovery.
US Crude Inventories Fall More Than Expected
Meanwhile, the US Energy Information Administration (EIA) reported on Wednesday that US crude inventories fell by nearly 6 million barrels in the week ended August 11, more than double the average analyst expectation. The drawdown was mainly driven by lower imports and higher refinery runs, as US fuel demand remained robust amid the summer driving season.
The EIA data also showed that gasoline inventories fell by 300,000 barrels, while distillate stocks rose by 300,000 barrels. The gasoline draw was smaller than anticipated, while the distillate build was in line with forecasts.
The decline in US crude stocks was seen as a bullish factor for oil prices, as it suggested that the supply glut that built up during the pandemic was being reduced. However, some analysts cautioned that the inventory data might not reflect the true state of demand, as it did not capture the impact of the recent surge in Covid-19 cases in some parts of the US.
Fed Minutes Signal Possible Tapering of Stimulus
Adding to the bearish mood in the oil market, the minutes of the Federal Reserve’s July meeting revealed that most policymakers agreed that they could start tapering their bond-buying program later this year, if the economy continued to make progress towards their goals. The Fed’s stimulus measures have been supportive of oil prices, as they have boosted liquidity and risk appetite in financial markets.
However, some Fed officials also expressed concerns about the risks posed by the Delta variant and inflation pressures, suggesting that they were not ready to commit to a timeline for reducing their monetary support. The Fed’s next meeting is scheduled for September 21-22, when it is expected to provide more clarity on its policy outlook.
Oil Prices Settle Lower After Volatile Session
Oil prices fluctuated between gains and losses throughout Wednesday’s session, as traders weighed the mixed signals from China, the US and the Fed. Brent crude, the global benchmark, settled down 0.3% at $70.59 a barrel, while West Texas Intermediate (WTI), the US benchmark, ended down 0.4% at $67.42 a barrel.
On a weekly basis, both benchmarks are down more than 5%, extending their losses from last week, when they posted their worst performance since October 2020. Oil prices have been under pressure from rising OPEC+ production, signs of slowing demand growth and uncertainty over the Covid-19 situation.
However, some analysts remain optimistic about the medium-term outlook for oil prices, citing tight market fundamentals and expectations of a supply deficit in the second half of the year. They also point to geopolitical risks, such as tensions in Iran and Venezuela, that could disrupt oil supplies and support prices.