Oil prices fell on Monday, putting an end to last week’s short-covering rally as investors await economic data from China, the world’s second largest crude consumer, for indications of demand recovery.
It follows both contracts reaching their fourth weekly gain last week.
China GDP outlook boosts commodities stocks
Russ Mould, investment director at AJ Bell, said corporate announcements from the US are likely to continue to grab the headlines. However, he also noted how a lot of the spotlight in macroeconomic terms is likely to draw on the data from China.
“For a FTSE 100 index teeming with resources stocks, this could have a big bearing given China is such a rapacious consumer of commodities.”
Rio Tinto is among the stocks that edged towards the top of the UK index ahead of China’s first-quarter gross domestic product (GDP) figures which are set to be released on Tuesday.
In its latest forecast, the International Energy Agency (IEA) said China will account for most of 2023 demand growth.
“World oil demand will climb by 2 mb/d in 2023 to a record 101.9 mb/d. Reflecting the widening disparity between regions, non-OECD countries, buoyed by a resurgent China, will account for 90% of growth,” it said.
Impact of oil output cuts by OPEC+
The IEA also noted that recent oil output cuts announced by major producers OPEC+ risk exacerbating an oil supply deficit that is expected in the second half of the year, which could weigh on consumers and a global economic recovery.
Investors are also keeping an eye on the Federal Reserve's potential policy path and the dollar's trajectory — anticipating another quarter of a percentage point rise in May.
The greenback has been strengthening alongside the interest rate hikes, which has made dollar-denominated crude oil more expensive for holders of other currencies.
Independent macro analyst Piero Cingari said: “Despite early evidence of cooling US inflation and a weaker labour market, which could indicate a slowing economy, oil prices remain above post-OPEC+ production cut levels, indicating that the market is prioritising supply concerns over demand ones. In fact, unless a severe recession occurs, the beneficial effect of China's economic reopening may more than offset any downturn in US demand.”
Reasons to be bullish on oil prices
Cingari also said the Federal Reserve is likely nearing the end of its hike cycle and noted positive seasonality for the energy market at this time of year and increased speculation of a US SPR replenishment in the near future.
“It's tough to find an argument that might materially depress oil prices in the near term. To induce some downturn in oil prices, we need to see a surprisingly hawkish Federal Reserve and further symptoms of a credit crunch in the economy. However, in the short run, bullish reasons outnumber negative ones,” he said.
What else could impact oil prices?
Osama Rizvi, oil and geopolitical analyst at Primary Vision, set out other indicators that could sway oil prices in the coming weeks.
“The number of loadings showcase whether there is a supply crunch or not. Recently, the number of total seaborne oil loadings show that the number hit a seven year average high. I will be keeping a watch of them for the next few weeks, especially after the production cuts were announced,” he said.
In addition to economic data from China, Rizvi said he is also watching expected production increases from Venezuela and Iran and tracking whether they are making it to the global oil supply.