Oil hits two-month low after China demand concerns offset shallow US inventories; Brent drops to $79/bbl

Crude oil prices traded at their lowest levels since early June on Tuesday, July 30, as worries about softer demand in China offset the prospect of lower US crude and product inventories. Discussions of a ceasefire in the Middle East have resulted in a steep decline in global crude oil prices since last week.

Brent crude fell by 77 cents, or 0.97 per cent, to $79.01 per barrel. US WTI crude was down 66 cents, or 0.87 per cent, at $75.15. At their intra-day lows, both contracts were down by more than $1. The front-month Brent contract traded at a low of $78.67 and WTI at $74.75, the weakest for both benchmarks since June 6. Coming to domestic prices, crude oil futures last traded 0.98 per cent lower at ₹6,289 per barrel on the multi-commodity exchange (MCX).

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What’s weighing on crude oil prices?

-A string of disappointing economic news from China, the world’s largest crude importer, has been weighing on commodity prices. China’s manufacturing activity will likely have shrunk for a third month in July. Analysts say that weakening global demand growth, an unresolved economic outlook in China and still-elevated global oil inventories continue to weigh on prices.

-Even as Chinese leaders vowed to step up support for the feeble economy, expectations on the extent of such measures have been limited since the Third Plenum policy meeting largely reiterated existing economic policy goals. Some support for oil could come from US inventory reports due this week, which are expected to show lower crude and fuel stocks.

-On Thursday, top ministers from the Organization of the Petroleum Exporting Countries and allies led by Russia (OPEC+) will meet to review the oil market, including a plan to start unwinding some output cuts from October. According to the news agency Reuters, no changes are currently expected in the output policy.

-Oil fell two per cent in the previous session after Israel signalled that its response to a rocket strike in Israeli-occupied Golan Heights on Saturday would be calculated to avoid dragging the Middle East into an all-out war.

-In OPEC-member Venezuela, the opposition said it had won 73 per cent of the vote in Sunday’s presidential election despite the national electoral authority having declared incumbent Nicolas Maduro as the winner.

-Analysts say Nicolas Maduro’s victory in the latest Venezuelan election is a headwind for global supply, as this could result in tighter US sanctions. Such a scenario could cut Venezuela’s exports by 100,000-120,000 barrels per day.

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Where are prices headed?

Analysts noted that WTI crude oil slipped 4.6 per cent last week, marking a third consecutive weekly decline. Weak demand prospects from top importer China and hopes for a ceasefire in Gaza outweighed the impact of declining US stock levels. 

‘’Markets assess better-than-expected Chinese industrial profits and uncertainty regarding the Israel-Gaza truce and keenly await the OPEC+ meeting due August 1. Official data showed China’s major industrial firms made a total profit of $484.1 billion in the first half of the year, marking a year-on-year growth of 3.5 per cent,” said Kaynat Chainwala, AVP-Commodity Research, Kotak Securities.

‘’The situation in the Middle East worsened after Israel attacked Hezbollah targets on Sunday and threatened further retaliation for an earlier rocket strike that killed 12 children while continuing to signal it was open to a proposed Gaza truce,” added Chainwala.

Brent crude trades below $80 a barrel after losing more than three per cent over the previous two sessions, while WTI crude was around $75 concerns for Asia’s biggest economy. ‘’Oil futures slid by nearly two per cent to seven-week lows on Monday after Israeli officials said they wanted to avoid dragging the Middle East into an all-out war while responding to the deadly rocket strike in the Israeli-occupied Golan Heights over the weekend,” said Mehta Equities.

‘’Recent data suggest that China’s total fuel oil imports fell by 11 per cent in the first half of 2024…We expect crude oil prices to remain volatile. Crude oil has support at $74.40-73.90, and resistance is at $75.70-76.20 today’s session. In INR crude oil has support at ₹6,270-6,200 while resistance at ₹6,430-6,500,” said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.