Oil prices continued to drop in Asian trading on Tuesday due to concerns over weak economic data from China and expectations of an interest rate increase in the United States. Brent crude fell by 0.3% to $79.07 a barrel, while U.S. West Texas Intermediate (WTI) crude dropped by 0.3% to $75.41 a barrel. Both benchmarks had declined by over $1 in their previous session.
According to Tina Teng, an analyst at CMC Markets, the downside pressure on oil is due to China’s economic recovery not being as promising as expected. This has resulted in clouded demand outlook on fuel consumption. Official data released on Sunday showed that China’s manufacturing activity unexpectedly fell in April, marking the first contraction since December in the manufacturing purchasing managers’ index. While China’s industrial and economic recovery from the pandemic was expected to boost demand this year, the weak manufacturing data is a cause for concern.
However, despite the weak manufacturing data, there are positive signs of recovery based on spending during the five-day Labour Day holiday in the world’s largest oil importer. Analysts at ANZ Research note that there has been a surge in sales at major retail and catering companies, with 19.7 million railway trips made across the country. Traffic is also expected to be 20% higher than in 2019, according to local media. CCTV reported that passenger travel on the first day of the holiday surged 151.8% from the same day last year.
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In addition, a Monday poll indicated that U.S. crude oil stockpiles are expected to have fallen for a third consecutive week, providing some support to the market. Reports from the American Petroleum Institute and the Energy Information Administration are due on Tuesday and Wednesday, respectively.
However, the U.S. Federal Reserve is expected to increase interest rates by another 25 basis points, which could have an impact on oil by slowing economic growth and denting energy demand. Inflation-fighting central banks could also impact oil.
Banking fears have also weighed on oil in recent weeks, with U.S. regulators seizing First Republic Bank over the weekend ahead of a deal in which JPMorgan bought most of its assets. This is the third major U.S. institution to fail in two months.
In conclusion, the oil market is currently facing a mix of both positive and negative factors. While spending during the Labour Day holiday in China is a positive sign of recovery, weak manufacturing data from the country has resulted in concerns about fuel consumption. Additionally, the U.S. interest rate increase and banking fears have also impacted oil prices. The oil market is expected to remain volatile as it navigates through these challenges.