Oil plunges amid US dollar strength, China demand concerns
Onome Amuge
Crude oil prices tumbled in Tuesday’s global commodities market trading, dragged lower by concerns over weak demand from China and a strengthened U.S. dollar.
The market’s concerns about China’s stimulus plan’s inability to effectively boost the world’s top oil-importing country’s economy have driven crude oil prices lower. These fears have raised concerns about potential oversupply, compounding market uncertainty and exerting downward pressure on prices.
The global benchmark Brent crude tumbled to $71.78 per barrel, while the U.S. benchmark West Texas Intermediate (WTI) declined to $67.94 per barrel.
The Chinese government’s announcement of a new stimulus plan aimed at addressing local government debt issues has fallen short of market expectations. Under this plan, the quota for issuing special debt bonds will be increased to 6 trillion yuan ($840 billion) for the next three years.
While this measure is expected to alleviate some of the financial stress faced by local governments, experts are skeptical about its effectiveness in reviving economic growth. Investors are seeking more comprehensive solutions, leading to concerns about how this stimulus package will impact oil prices and overall economic performance in China.
In a recent report, the Organization of the Petroleum Exporting Countries (OPEC) revised its global oil demand forecast downward for the year, citing concerns over the Chinese market.
The downward revision amounted to a decrease of 106,000 barrels per day (bpd), reflecting growing pessimism among OPEC analysts about the health of the Chinese economy.
The US dollar’s upward trend, which gained momentum after the US election, has negatively impacted not only the oil market but also the broader commodities complex, ING analysts noted in their latest research.
The dollar’s rise against other currencies makes commodities less attractive to investors holding non-dollar denominated assets. Furthermore, the front-month time spreads for Brent and West Texas Intermediate have narrowed, indicating a shift towards contango- a market condition in which the future price of a commodity is higher than the current price.
As the oil market awaits OPEC’s monthly oil market report to be released today, the potential for further revisions to the group’s demand outlook remains. Last month, OPEC had lowered its demand growth estimates by 110,000 b/d and 100,000 b/d for 2024 and 2025 respectively, indicating a cautious stance.
However, OPEC’s current projections for demand growth—at 1.93 million b/d for 2023 and 1.74 million b/d for 2024—are substantially higher than other forecasts, which range closer to one million b/d, according to ING.