Oil prices drop on demand concerns after weak Chinese manufacturing data

No 'radical change' is expected in Opec+ policy as the group meets this week to decide on future supply

A pump jack in Texas. Oil prices have remained volatile in recent weeks. AP
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Oil prices dropped on Monday on weak manufacturing data from China, the world’s largest importer of crude, as markets await the Opec+ meeting later this week on supply adjustments in a tight market.

Brent, the global benchmark for two thirds of the world's oil, was trading 1.37 per cent lower at $102.55 a barrel at 1.20pm UAE time on Monday. West Texas Intermediate, the gauge that tracks US crude, was down 2.10 per cent at $96.55 a barrel.

Manufacturing growth in China slowed in July as the government continues to enforce its “zero Covid” strategy to control the spread of the coronavirus pandemic.

The official purchasing manufacturing index dropped to 49 in July from 50.2 a month earlier. The private sector Caixin PMI also fell in July, to 50.4 from 51.7, on the manufacturing index, well below market expectations.

“The persistence of the [zero] Covid policy in China remains a negative for global growth, as highlighted by the IMF [International Monetary Fund] in their latest World Economic Outlook,” said Edward Bell, senior director of market economics at Emirates NBD.

The IMF last week lowered its growth forecast for the global economy for the second time this year amid the Covid-19 pandemic, Russia’s war in Ukraine and an economic slowdown in China.

The Washington-based fund now projects global growth at 3.2 per cent in 2022 and 2.9 per cent in 2023, revising it down 0.4 percentage points and 0.7 percentage points from its April forecast, respectively.

Renewed lockdowns in China have slowed the growth momentum in the world’s second-largest economy. Its economic output is forecast to grow 3.3 per cent this year, after expanding 8.1 per cent last year, according to the IMF.

Oil prices have remained volatile in recent weeks as investors consider concerns about demand growth amid an economic slowdown against supply constraints as the Russia-Ukraine conflict continues.

The market is also keenly watching the Opec+ meeting on Wednesday.

The super group of oil producers, which includes Russia, is set to meet on August 3 to decide what to do with spare capacity once the production pact expires at the end of this month.

The group has been unwinding record output cuts put in place during the pandemic.

“This week, Opec+ will be in focus and what strategy the producers’ alliance will take from September onward,” Mr Bell said.

“The Russian and Saudi energy ministers met at the end of last week with a pledge to be 'firmly committed to the goal of the Opec+ agreement on preserving market stability', which may be a signal that markets shouldn’t expect a radical change in policy.”

Updated: August 01, 2022, 9:39 AM