Business a.m
Oil futures took a hit on Wednesday,losing over $1 as fears over the Chinese economy's future growth prospects weighed on the commodity's demand outlook. The U.S. dollar's strength also served as a headwind, as investors grew wary of riskier assets like oil.
Brent crude futures plunged $1.38 per barrel on Wednesday, a 1.8 per cent decline, settling at $76.91 per barrel. West Texas Intermediate crude futures (WTI) saw an even greater slide, falling by $1.35 or 1.9%, to close the day at $71.05 per barrel.
Recent data shows that the ongoing conflict in the Red Sea, with naval and air engagements testing nerves in the region, has not been enough to buttress oil prices. The potential for increasing shipping costs and slower deliveries of crude oil due to the unrest has failed to quell traders' fears that economic expansion in China is stalling, lowering future demand forecasts for crude.
In a disappointing development for oil bulls, China's economy grew by 5.2 per cent in the fourth quarter of last year, a figure that fell short of analysts' expectations and raised questions about future demand for crude. The lower-than-anticipated economic expansion calls into doubt the notion that China's appetite for oil will drive global growth in 2024.
The latest economic data has been a blow to the hopes of oil bulls that China will be the engine of demand growth in the coming years, said Priyanka Sachdeva, a senior market analyst at Phillip Nova. She added that the oil industry was betting on China's robust demand recovery in 2024 and 2025, despite some bumps along the way. However, the latest data calls into question how resilient this demand recovery will truly be.
In contrast to the gloomy picture painted by the economic data, OPEC remained optimistic about the outlook for global oil demand in 2024, with a forecast for continued growth, particularly in China and the Middle East. However, the OPEC outlook does not account for the latest economic data, which could call into question its predictions for robust demand.
The strength of the U.S. dollar has also added to the bearish sentiment around oil prices, as a stronger dollar makes oil more expensive for buyers using other currencies.
Meanwhile, U.S. oil refiners are planning to reduce capacity for the week ending January 19th by 954,000 barrels per day, according to research firm IIR Energy. This reduction is larger than anticipated and may put further pressure on fuel supplies, which could lead to upward pressure on oil prices.
Despite the heightened tensions in the Red Sea, the oil market has been relatively sanguine in its response, with no immediate disruption to crude oil shipments or a spike in prices. However, consumers may experience a surge in the realised price of oil and petroleum products, given the increased costs of transporting oil through the Red Sea and the Suez Canal. The potential for further disruptions remains a risk to the market, with any large-scale incident having the potential to push prices significantly higher.