Oil prices retreated on Wednesday, pressured by lackluster economic indicators from China, the world’s largest importer of crude, dampening demand sentiment. Nonetheless, prices are on track for their first monthly gain since September, buoyed by escalating conflicts in the Middle East, which have raised concerns about supply disruptions.
Brent crude futures for March, expiring today, edged down 27 cents, or 0.3%, to $82.60 a barrel by 0441 GMT. Meanwhile, the more actively traded April contract dipped 26 cents to $82.24. U.S. West Texas Intermediate (WTI) crude futures slipped 23 cents, or 0.3%, to $77.59 a barrel.
The latest official factory survey showed that manufacturing activity in China, the world’s second-largest economy and a key oil consumer, contracted for the fourth consecutive month in January. This suggests a sluggish start to economic momentum in 2024, casting doubt on forecasts for oil demand growth primarily driven by Chinese consumption.
Lynn Song, chief economist at ING bank, noted that the Chinese manufacturing sector is facing pressure amid a weak domestic recovery and subdued external demand.
Despite these economic headwinds, both oil benchmarks are poised to record gains for the month, supported by the widening conflicts in the Middle East. The naval clash in the Red Sea between the U.S. and Iran-aligned Houthi militants, alongside other regional tensions, has disrupted oil and natural gas tanker shipping routes, amplifying concerns about supply disruptions.
However, actual output has not been significantly impacted by the conflicts, and worries about lower oil demand growth have tempered the gains driven by geopolitical tensions.
Market analyst Tony Sycamore of IG highlighted that while recent events, including a drone attack on U.S. troops, have intensified geopolitical concerns, the technical outlook for oil prices remains bearish.
U.S. President Joe Biden indicated that he had formulated a response to the recent attack near the Jordan-Syria border but emphasized his desire to avoid escalating tensions in the Middle East.
In the Israel-Palestinian conflict, Hamas reported that it was reviewing a ceasefire proposal, signaling a potential easing of hostilities. However, market observers remain wary, as a ceasefire in Gaza may not address the ongoing clashes in the Red Sea involving the Houthis.
Mixed inventory data from the American Petroleum Institute (API) showed a decline of 2.5 million barrels in crude stockpiles for the week ending Jan. 26. Gasoline inventories increased by 600,000 barrels, while distillate stocks fell by 2.1 million barrels. U.S. government data on oil inventories is scheduled for release later on Wednesday.