Oil prices recover by 2.1% to close at USD 78.30/barrel

Crude oil prices have risen this week in response to the positive demand outlook in the global commodity market. The price increase was seen in Brent and US West Texas Intermediate after trading was down last week.

The price of Brent crude oil, which was last quoted at $80.40 on Thursday of the previous week, has not been able to reach this level in the past six trading days. The reason for this was weak economic data from China, the world's largest oil importer, and the USA, the largest oil consumer.

Data released last week showed new home prices in China continuing their 14-month downward trend, falling 4.9 percent year-on-year in July.

Meanwhile, the country's industrial production rose 5.1 percent year-on-year, falling short of forecasts. The unemployment rate exceeded expectations at 5.2 percent.

In addition, weak labor market data from the US increased concerns about economic growth and reinforced predictions of subdued demand from China.

The U.S. Department of Labor has revised its nonfarm employment data for the 12-month period ending March 2024. The revision shows that U.S. employment increased by 818,000 fewer jobs during that period than previously reported.

While the number of people filing for unemployment benefits for the first time in the United States rose to 232,000 in the week ending August 17, the number of ongoing jobless claims increased by 4,000 to 1.86 million in the week ending August 10.

The data added to concerns about economic growth in several countries and heightened market participants' worries about demand, leading to a decline in prices.

On the other hand, the prospect of a ceasefire in the Middle East, where much of the world's oil reserves are located, eased supply concerns on the markets and contributed to the price decline.

Against the backdrop of these developments, the price of Brent crude oil, which had risen to $81.92 last week, could not maintain this level and ended the week at $79.10.

On Wednesday, the price of Brent fell to $75.70 per barrel, losing 1.3 percent in value on the same day.

After Federal Reserve Chairman Jerome Powell announced the need for monetary policy adjustment in his speech at the Jackson Hole Economic Policy Symposium, prices ended the week at $78.30, up 2.1% and indicating a recovery trend, but remained below $80.

China's lower than expected oil demand is a key focus of the market

The decline in oil prices was due to a combination of several factors and not a single cause, Julien Mathonniere, oil market economist at US company Energy Intelligence, told Anadolu.

Mathonniere noted that the weak demand forecast from China was the most important factor among these reasons, stressing that China's lower-than-expected oil demand was a major problem for the market, especially after the Organization of the Petroleum Exporting Countries (OPEC) lowered its forecast for global demand growth through 2024 in response to these weak forecasts.

Mathonniere also noted that the decline in gasoline and diesel production by refineries in China in July compared to the same period last year also had an impact on prices.

“Chinese refineries reduced their gasoline and diesel production in July compared to the same period last year, even though demand for these two products was supposed to increase in the third quarter. And because this happened in China, the world's largest oil importer, this downward trend has revived the prospect of peak demand for transport fuels and thrown global prices into turmoil again,” Mathonniere said.

Contrary to forecasts, China has not seen significant demand growth this year, Mathonniere said. He added that Energy Intelligence reported a year-on-year decline in Chinese oil demand of 284,000 barrels per day in the second quarter, reflecting weak industrial activity and instability in the private sector.

“With Brent oil now trading in October, the country's ability to meet expectations is increasingly being questioned,” he said.

Mathonniere cited concerns about discrepancies between reported and actual quantities in oil storage, transportation or sales transactions as another factor in the decline.

For this reason, says Mathonniere, market participants believe that either supply is underestimated or demand is overestimated. This discrepancy creates uncertainty among market participants and leads to a market reaction characterized by falling prices.

Mathonniere stressed that the impact of renewed ceasefire negotiations in the Middle East on oil prices had been limited, and cautioned that the hope for reconciliation in the region was not enough to reduce the risk premium on prices.

“A bank analyst spoke of a risk premium of $4 to $8 per barrel earlier this week, but I disagree and think that the risk premium, if it exists, melted away some time ago. The Middle East is no longer the focus for oil traders, even if it continues to simmer in the background,” Mathonniere said.

– Prices are unlikely to rise significantly unless demand in China increases

Mathonniere mentioned that prices are expected to rise unless China's oil demand increases in the future, and pointed to an interesting theory: the market may try to force OPEC to act by lowering prices.

According to Mathonniere, this could prompt the group to halt its planned cuts in the fourth quarter. While it may be somewhat optimistic to expect the market to force such a concerted price reduction, falling prices will likely prompt the group to reconsider its plans for a cutback towards the end of the year.

The market is focusing on the Federal Reserve's decision to find direction

Gaurav Sharma, an independent oil market analyst based in London, also said that oil prices could rise if the US Federal Reserve cuts interest rates in September. He added that he believes the market is closely watching the US Federal Reserve's decisions to determine its direction.

“If a rate cut is announced in September, it could have a positive impact on crude oil futures. Until then, market weakness is likely to persist,” Sharma said.

Sharma noted that uncertainties about oil demand in China were putting pressure on crude oil prices, pointing out that recent data showed a slowdown in industrial production, rising unemployment and falling property prices in China.

He stressed that these challenges will be difficult to overcome, especially since many market forecasters, including the International Energy Agency (IEA) and OPEC, predict lower Chinese demand in 2024 and 2025.

Sharma pointed out that the impact of geopolitical developments in the Middle East on the oil market was limited, saying that with continued weak oil demand, geopolitics could have only a limited impact on crude oil prices.

“This is particularly true at present given the increasing supply of crude oil from non-OPEC countries,” he concluded.