Oil prices decline due to worries about China’s demand despite concerns about supply.
Published on: January 31, 2024.
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Oil Prices Fall on China’s Property Crisis: Potential Impact on Supply Risk Premium
Oil prices dropped more than a dollar per barrel on Monday due to concerns over China’s struggling property sector. This uncertainty regarding demand caused traders to reevaluate the supply risk premium associated with escalating tensions in the Middle East.
Brent crude futures declined by $1.15, or 1.4%, settling at $82.40 a barrel. Additionally, U.S. West Texas Intermediate crude futures fell by $1.23, or 1.6%, at $76.78 per barrel. This marked the first time in four sessions that both contracts settled lower. Focus shifted to demand worries in China as a Hong Kong court ordered the liquidation of Chinese real estate giant, China Evergrande Group, thus deepening the real estate crisis. Earlier data already indicated slower-than-expected activity.
The deteriorating condition of China’s real estate sector negatively impacts investor confidence in the economy, and this concern caused oil prices to drop. John Kilduff, a partner at Again Capital LLC, stated that the situation in China is the main obstacle to the entire market, leading to the market retracting from the war risk premium.
Despite both benchmarks initially gaining about 1.5% during Monday’s trade, with Brent prices reaching their highest level since November, events in the Middle East caused tensions to intensify. This uptick in tensions followed a fuel tanker being hit by a missile in the Red Sea and an attack on U.S. troops near the Syrian border in Jordan. However, after news broke about China’s property crisis, market participants began questioning the extent of the risk premium since oil supplies have not directly been affected by the Middle East situation.
Gary Cunningham, the director at energy advisory firm Tradition Energy, expressed that there is currently a premium of around $10 a barrel when it should realistically be $3 or $4 based on genuine petroleum demand fundamentals.
Also in focus were lingering concerns about high interest rates. This came after European Central Bank policymakers failed to reach a consensus on when interest rates should be reduced.
Furthermore, Russia is likely to decrease its exports of naphtha, a petrochemical feedstock, by a significant amount due to fires disrupting operations at Baltic and Black Sea refineries. This reduction in exports would amount to about one-third of Russia’s total exports. Additionally, another Russian oil facility faced an attack when authorities thwarted a drone attack on the Slavneft-YANOS refinery in Yaroslavl.
In terms of inventory, it was anticipated that U.S. crude oil and distillates inventories decreased last week, while gasoline stocks were expected to rise. The American Petroleum Institute will publish its U.S. stockpiles data on Tuesday, and official data from the Energy Information Administration is scheduled for release on Wednesday.
Overall, the current drop in oil prices can be attributed to concerns over China’s property crisis and its potential impact on the supply risk premium. Additionally, factors such as high interest rates and disruptions in Russian oil facilities also contributed to market volatility.
Source: [Zawya.com](https://www.zawya.com)
