Oil ends five-day rally amid concerns about China slowdown

Crude prices gained last week on the back of a bigger-than-expected Opec+ output cut

A pump jack and drilling rig on an oilfield in New Mexico. Oil prices have slipped as market attention turns to the cycle of economic data. Reuters
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Oil prices were down on Monday, ending a five-day rally as investor focus shifted away from last week's Opec+ output cut to slowing economic activity in China.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.88 per cent lower at $97.06 a barrel at 1.43pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.84 per cent at $91.86 a barrel.

Services activity in China, the world’s largest crude oil importer, contracted in September after three straight months of expansion, amid new coronavirus outbreaks and stricter containment measures, according to an industry survey.

The Caixin China General Services Business Activity Index fell to 49.3 in September, from 55 in the previous month. A figure above 50 indicates an expansion in activity.

“Oil prices will have some downside risk as market attention moves away from the Opec+ meeting and back to the cycle of economic data out of the US and China,” Edward Bell, senior director of market economics at Emirates NBD, told The National.

“A sharp drop in China’s services purchasing managers’ index highlights the negatives for oil demand as activity in the country remains affected by the Covid-zero policy,” Mr Bell said.

Meanwhile, the US reported a “stronger-than-expected” jobs report last week and this has cleared the path for more “aggressive” rate increases from the US Federal Reserve, he said.

The Fed raised its interest rate by 75 basis points for the third time to a range of 3 per cent to 3.25 per cent in September. Federal Open Market Committee officials expect to raise the benchmark rate to 4.4 per cent by the end of this year.

Oil prices have been rising since the 23-member Opec+ group of oil producers announced an output cut of 2 million barrels per day last week after its first in-person meeting in Vienna since March 2020.

Brent crude gained about 10 per cent last week.

Opec+ is “here to stay as a moderating force to bring about stability”, Saudi Energy Minister Prince Abdulaziz bin Salman said during a press conference after the meeting.

“Energy is something that can never be attended to in short-term tweaks and moves … the world energy markets need attendance, careful planning and investments,” he said.

Since the meeting, numerous investment banks and lenders have raised their oil price outlook for the remainder of 2022 and 2023.

Goldman Sachs raised its oil price forecast by $10 a barrel to $110 for the last three months of the year, and to $115 for the first quarter of 2023.

“Recent fundamental developments reinforce these clear upside risks. Global stocks are reversing their recent builds, especially adjusting for soaring oil on water related to the redirection of Russian flows,” the investment bank said.

“China remains drawing at an unsustainable rate, merely delaying this tightening to ex-China balances. The latest … US demand estimate confirm that this summer's demand soft patch was seasonal … with demand rebounding since.”

Updated: October 10, 2022, 10:24 AM