- Oil market expected to remain volatile in the coming week, influenced by economic data, China's economic challenges, and Federal Reserve statements at the Jackson Hole event.
- Evergrande's Chapter 15 bankruptcy filing highlights China's economic challenges.
- Reduced Russian crude sales to China and India in July may affect around 1.9 million barrels of sales.
Oil bulls’ mission for this week: Shut out the never-ending gloom over China and the fear of what the Fed could do and focus on restarting the stalled rally in crude.
Early trading in Asia on Monday suggested that longs in oil may have gotten their wish partially as crude prices for both New York-based West Texas Intermediate, or WTI, and London-based Brent traded between flat and positive, seemingly on tighter supply concerns.
The move came as data from oil cargo tracker Kpler indicated a dramatic drop in crude exports from OPEC+ in the first 15 days of August.
Kpler data shows China and India buying just 2.6M barrels per day from Russia in July, compared with their typical combined purchase of 4.5M barrels daily. This suggests that some 1.9M barrels of Russian crude sales were impacted last month, possibly due to Urals crude being priced higher than the $60-per-barrel cap allowed by the G7 under sanctions against Moscow.
Combined Saudi and Russian cuts over the next 45 days could take away 67.5M barrels, energy markets advisory HFI Research said, summing up its own calculations of Keplr data.
WTI for the front-month September contract was actually down 5 cents at $81.20 per barrel by 01:00 ET (05:00 GMT). WTI finished last week down 2.3% after a near 20% gain over seven previous weeks.
But Brent was up 54 cents, or 0.8%, at $85.34 per barrel. Like WTI, Brent also lost around 3% last week after a seven-week rally that gave oil bulls an 18% return.
Some analysts said crude was expected to stay volatile through the week and possibly end lower as technicals, combined with the “China-bear” story and hawkish talk by the Federal Reserve at its much-watched annual policy event at Jackson Hole, Wyoming, weigh on the market.
Yuan Tumbles, Oil Prices Suffer as China's Economy Falters
China's renewed economic weakness has raised questions over whether its oil demand can remain resilient.
Evergrande, one of China’s biggest names in real estate, filed Thursday for Chapter 15 bankruptcy, which is a way for foreign companies to use US bankruptcy law to restructure debt. The process will take time, as Evergrande has roughly $19 billion in offshore debts.
The filing serves as a cautionary tale about the growth-at-all-costs model that underpinned China’s spectacular growth over the past 30 years. For decades, Evergrande — pronounced “ever grand,” with a silent final “e” — gobbled up debt as China’s economy exploded.
Demand for housing was so strong homebuilders often pre-sold apartment units to buyers before construction was complete.
But a sudden shift in policy by China’s leaders two years ago has left the country’s property developers scrambling for cash, compounding financial risks within the world’s second-largest economy.
Evergrande’s crisis raises questions on which would be the next shoe to drop on the Chinese economy. And that appears to be Country Garden, another major name in realty that employs some 300,000 people.
The firm has already missed two payments on its multibillion-dollar debt and said it was considering “various debt management measures.”
July was a particularly woeful month for China, with one bad patch of economic data after another, from bank loans at a 14-year low and exports sliding the most since February 2020. The yuan also tumbled against the dollar, adding to the weight on commodities, particularly oil.
The People’s Bank of China unexpectedly cut short and medium-term lending rates earlier this week, but investors are calling for more targeted fiscal measures.
Powell's Speech to Set the Tone for Markets
Analysts at New Zealand bank ANZ said in a note carried by Reuters:
"A risk-off tone across markets weighed on sentiment, triggered by concerns of further monetary tightening amid strong growth and entrenched inflation.”
Investors will be looking to a speech by Fed Chair Jerome Powell for clarity on the economic outlook and the future path of interest rates.
Powell’s speech, set for 10:05 am ET on Friday, comes after last week’s minutes of the central bank’s July meeting showed that most policymakers are still concerned about upside risks to inflation, indicating that further rate hikes cannot be ruled out.
Investors will be focusing on whether the Fed head believes more policy tightening will be needed to bring down inflation or if enough progress has been made to keep rates on hold. Market watchers will also be on the lookout for any clues on whether the Fed is weighing the prospect of rate cuts in 2024.
Traders see an 89% chance of the Fed holding rates at current levels at its September meeting, according to Investing.com's fed rate monitor tool.
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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.