China Provides Some Respite as Oil Prices Rise

(Rystad, 24.Sep.2024) — Oil prices are on the rise again, but OPEC’s production cut unwinding still seems far off.

Here is Rystad Energy’s oil macro update from Global Market Analysis Director, Claudio Galimberti:

“The Chinese government’s announcement of its largest stimulus package since the pandemic, combined with the sudden rise of geopolitical tension in the Middle East, and the threat of another hurricane in the Gulf Coast, has dealt a blow to the bearish sentiment that dominated the oil markets in the past three weeks. The stimulus is good news for oil demand, which has been weaker than expected, specifically in China, for the past three months. The threat of military escalation in the Middle East after Israel’s attack on Hezbollah adds more risks to the supply side. At $75 per barrel, prices are slowly inching back to their fair values consistent with the supply and demand fundamentals”

Brent oil prices are gaining momentum, topping $75 per barrel on 24 Sep., supported by last week’s Fed rate cut, promising economic news from China and escalating geopolitical tensions.
Disappointing data on European manufacturing dampened markets yesterday, with the eurozone reporting a surprising contraction in business activity, but news from China helped lift markets again today.

The announcement from Xi Jinping’s government was sweeping, highlighting the administration’s concern surrounding recent slow growth and weak demand.

The stimulus has had an immediate impact on oil prices, but the long-term impact on oil demand could be key.

The package could reignite fuel demand in the world’s largest oil importer, especially after a steep drop in refined oil imports this year driven by its manufacturing sector struggles.

After weeks of cautious optimism surrounding Gaza ceasefire talks, negotiations have stalled with no progress over the past two weeks despite relentless diplomatic efforts.

Tensions have surged further as Israel and Hezbollah traded heavy fire over the weekend.
Hezbollah launched 150 rockets and drones, triggering Israeli airstrikes on its positions, following a deadly Israeli strike in Beirut that killed 45, including top Hezbollah figures.

While the escalation briefly supported oil prices, the overall impact was muted compared to previous flare-ups, fueled by growing expectations that OPEC’s spare capacity—bolstered by extended production cuts—would help absorb any supply disruption shock.

The Federal Reserve’s 0.5% interest rate cut announced on 18 September was a somewhat aggressive cut that surprised many market watchers.

Despite the deeper-than-expected cut, the Fed is anticipated to continue reducing rates in the coming months.

Based on bond market trends, the benchmark lending rate can fall below 3.5% over the next two years.
Following the announcement, 3-month U.S. government bond yield decreased slightly, fully pricing in the 0.5% cut.

Brent crude prices strengthened for a weekly gain, along with oil’s implied volatility easing toward the end of the week.

While lower borrowing costs typically stimulate economic activity, observers remain cautious as some link the deeper cut to a weakening job market.

China’s refinery runs have dropped by 460,000 bpd this year vs. the same period in 2023, with a total expected decline of 370,000 bpd for the full year.

Despite the government’s recent release of an 8-million-ton export quota (bringing the annual total to 41 million tons, slightly above last year), domestic gasoline and diesel demand remains weak, limiting support for refinery utilization.

While refiners have been pushing for more export quotas to boost operations, the government’s environmental concerns have kept the quotas in check.

The quota may increase next year as reduced refinery runs pose broader economic risks.

The spotlight remains on the US this week, with key economic data releases anticipated.

The final quarterly GDP growth for 2Q is projected to remain at 3%, while the Aug.t PCE price index is expected to decline slightly to 2.4% year on year, down from 2.5% in the previous month.
These figures will help gauge the economic outlook following the first interest rate cut.

Additionally, China’s PMI will be released on Sunday, 29 Sep., which should further shed light on the sentiment as the country grapples with its economic recovery challenges. It may be too early to see the effect of the stimulus on the PMI.

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