Oil Declines as Economic Growth Concerns Weigh on Prospects for Chinese Demand Rebound

By Gina Lee

Oil prices experienced a decline on Friday morning in Asia, as concerns over weaker economic growth overshadowed expectations for a demand recovery in China.

Brent crude fell 0.72% to $111.23, while West Texas Intermediate (WTI) dropped 0.99% to $108.80, marking its final day as the front-month contract. Futures for July decreased by approximately 0.6%, settling at $109.20. This marks the first time since mid-February 2022 that WTI futures are poised for a fourth consecutive rise.

The oil market has shown limited gains over the past week, with Brent and U.S. benchmarks mostly fluctuating within a narrow range due to demand uncertainty.

Investors are increasingly anxious about escalating inflation and stricter monetary policies from central banks, leading to a reduced appetite for riskier assets. Notably, open interest in WTI futures dropped to 1.722 million contracts on May 18, 2022, the lowest level since July 2016.

Stephen Innes, managing director of SPI Asset Management, noted that if U.S. growth data continues to deteriorate, oil prices might become ensnared in a negative feedback loop similar to the stock market.

In the Asia-Pacific region, fuel demand in China, the world’s largest crude importer, may see a recovery as Shanghai has begun easing some COVID-19 restrictions, allowing residents to shop for groceries for the first time in nearly two months.

In the United States, Americans are returning to the roads, according to a report from the Federal Highway Administration regarding vehicle miles. This resurgence comes even as gasoline and diesel prices hit new record highs, as noted by the Automobile Club. Additionally, the U.S. House of Representatives approved legislation empowering the president to issue an energy emergency declaration, which would prohibit excessive increases in gasoline and home fuel prices.

Meanwhile, an impending European Union ban on Russian oil has provided a boost to oil prices. Although a new package of sanctions against Russia has been proposed in response to its invasion of Ukraine earlier this year, it has yet to be finalized.

On another front, Russian oil exports are complicating Iran’s ability to sell its own crude. Since the onset of the conflict in Ukraine, Iranian oil exports to China have plummeted as the latter seeks heavily discounted Russian barrels. Currently, nearly 40 million barrels of Iranian oil remain on tankers in Asian waters without buyers.