Oil prices fell by nearly 2% on Friday, capping a volatile week driven by concerns over weakening demand from China, the world’s largest oil importer. Brent crude futures settled at $79.68 per barrel, down $1.36 or 1.7%, while U.S. West Texas Intermediate (WTI) crude closed at $76.65, a decline of $1.51 or 1.9%. Despite these fluctuations, both benchmarks remained relatively stable over the week.
The drop in oil prices was primarily triggered by recent data from China showing a slowdown in its economy. July’s economic indicators revealed a decline in new home prices, the fastest in nine years, a slowdown in industrial output, and rising unemployment. These factors have raised alarms among traders about the potential for reduced oil demand, as Chinese refineries have already cut crude processing rates due to sluggish fuel demand.
Adding to the bearish sentiment, the Organization of the Petroleum Exporting Countries (OPEC) revised its forecast for oil demand growth this year, citing economic softness in China. The International Energy Agency (IEA) followed suit, also lowering its demand forecasts for 2025, further contributing to the uncertainty in the market.
Middle East Tensions and Global Supply Fears
Earlier in the week, oil prices saw an upswing as traders reacted to potential supply disruptions in the Middle East. Fears of retaliation by Iran against Israel, following the assassination of a Hamas leader in Tehran, initially drove prices higher. However, as the week progressed without significant escalation, much of that risk premium was priced out of the market.
Analysts from Commerzbank noted that while the threat of supply disruptions had been a concern, it remained largely theoretical, allowing the market’s focus to shift back to demand-side issues. Brett Friedman, a contributor to OptionMetrics, echoed this sentiment, emphasizing that the absence of actual disruptions allowed traders to concentrate on the more immediate concerns regarding demand, particularly from China.
In related developments, Gaza ceasefire talks resumed on Thursday in Qatar but were paused until next week, with conflicting reports on the progress of the negotiations. This ongoing uncertainty in the Middle East continues to add a layer of complexity to the oil markets, though it has yet to lead to significant supply disruptions.
U.S. Economic Data and Market Outlook
Despite the bearish signals from China, a series of positive data releases from the United States provided some support for oil prices, preventing a more significant decline. U.S. retail sales outperformed expectations, and the number of Americans filing new jobless claims fell, sparking renewed optimism about economic growth in the world’s largest oil consumer.
However, market direction remains uncertain, with many investors awaiting the U.S. Federal Reserve’s decision on interest rates at its September meeting. Independent oil analyst Gaurav Sharma suggested that oil prices might remain directionless until the Fed’s next move becomes clear.
Adding to the week’s volatility, low trading liquidity was noted, with many European and North American investors still on holiday. UBS analyst Giovanni Staunovo pointed out that this reduced market participation likely amplified price swings throughout the week.
Looking ahead, the oil market is expected to remain sensitive to developments in China and the Middle East, with traders closely monitoring both demand signals and geopolitical tensions. The balance between these factors will likely dictate the direction of oil prices in the coming weeks.
Source: Reuters
