Texas economy

China’s economy and EU energy scene will drive oil this week

Economic activity in China and the changing energy landscape in the European market could be the driving factors for oil markets this week, analysts said.

Weakening economic conditions in major world economies last week overtook some of the supply concerns that followed the Organization of the Petroleum Exporting Countries’ decision to cut production in October.

West Texas Intermediate, the US benchmark for the price of oil, had another wild ride, posting a daily loss of 5.7% on Wednesday and a gain of nearly 4% two days later. Ultimately, however, WTI lost around 2.5% to close the week at $86.09 a barrel.

This week, said Edward Gardner, commodities economist at London-based Capital Economics, the demand side of the market equation could once again trump supply. The outlook for energy demand is clouded by China’s strict COVID-19 restrictions, which are having a dramatic impact on its economy.

A mid-September vacation and similar plans for October could be put on hold this year for millions of Chinese in lockdown due to the zero-tolerance policy against COVID-19. Slow economic growth meant that China’s crude oil imports for August were 9.4% lower than the same period last year, according to customs data.

Gardner said to pay attention to the Chinese government as it prepares for the Communist Party’s regular five-year meeting in October, which could further tighten Chinese President Xi Jinping’s tight controls. Xi is expected to be elected to a third term, breaking the recent precedent that limited the party and national leader to two terms.

China’s economic malaise adds to growing fears that a slowing global economy will depress demand. Gardner said the question then becomes whether OPEC and its allies, known as OPEC+, respond by cutting production further. demand concerns.

“After all, the group agreed last Monday to ‘continuously monitor’ the oil market and potentially make ‘adjustments’ before October if necessary,” Gardner said.

OPEC+ chose last week to cut production by 100,000 barrels per day in October,

Phil Flynn, an energy analyst at the PRICE Futures Group in Chicago, said he was focused on the possible showdown between Western allies and Russia over a proposed fuel price cap. The major industrialized nations of the Group of Seven have announced plans for a still-determined price cap on Russian oil and natural gas exports to deprive the Kremlin of funds it needs to wage war on Ukraine.

“There will be a real possibility that Russia will send a message to the EU by cutting oil supplies, and I think there is a significant risk of a price spike,” Flynn added.

But the overall economy could dampen the momentum in crude oil prices, said Jeff Mower, director of oil news in the Americas for S&P Global Commodity Insights. Both the Bank of Canada and the European Central Bank raised key rates by three-quarters of a percent last week to fight inflation, and it may be inevitable that the Federal Reserve will follow suit when it will meet again at the end of September.

“If higher rates slow economic growth, that could weigh on demand for crude oil (and lower prices),” Mower said.

US inflation data for August is released on Tuesday. Retail sales figures and a preliminary reading of consumer sentiment for September from the University of Michigan round out the week.