Brent, the benchmark for two-thirds of the world’s oil, was trading 1.89 per cent lower at $84.58 a barrel at 9.08pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 2.21 per cent at $80.69 per barrel.
On Monday, Brent settled 0.69 per cent lower at $86.21 a barrel, while WTI fell 0.82 per cent to settle at $82.51.
The People’s Bank of China on Tuesday lowered its medium-term lending facility, a key policy rate, by 15 basis points to 2.5 per cent.
"The cut to policy rates comes as China’s economy underperforms with particularly soft data coming out of the property market," said Edward Bell, senior director of market economics at Emirates NBD.
"The cut to the MLF was a surprise to market expectations and was a larger move than the last cut to policy rates of 10 bps (basis points) in June."
The move follows weak economic data for July.
China's industrial output grew 3.7 per cent from a year earlier, down from the 4.4 per cent growth seen in June, according to the National Bureau of Statistics.
Meanwhile, retail sales rose by 2.5 per cent, slowing from a 3.1 per cent increase in June, and recording its slowest growth since December 2022.
China's economy has not only missed expectations of a "great post-Covid recovery", but is now dealing with a property slump, and morose consumer and investor sentiment, worsened by a crisis at the country's largest private real estate developer Country Garden, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said.
"[The] surprise rate cut will hardly reverse appetite for Chinese investments as meaningful fiscal stimulus becomes necessary."
China has officially fallen into deflation, with both consumer and producer prices declining in July compared with a year ago.
The country's credit data for last month showed a slump in demand from households and businesses to borrow money for the future.
“Credit dynamics slowed sharply in July, led by very weak new bank loans. Loans to private households declined again, and corporate borrowing also turned out weaker than in previous years,” said Sophie Altermatt, an economist at Swiss private bank Julius Baer.
“The renewed drop in longer-term household loans does not bode well for residential housing demand and the ailing real estate sector."
Oil prices have recorded gains for seven straight weeks amid easing concerns of an economic slowdown in major economies and tightening crude supply.
The International Energy Agency expects global oil demand to expand by 2.2 million barrels per day this year, with China accounting for more than 70 per cent of the growth.
However, growth in crude consumption is expected to slow to 1 million bpd next year as the post-pandemic economic rebound runs out of steam, the IEA said in its monthly oil market report last week.
“If China doesn’t get some major stimulus, global growth concerns won’t be going away anytime soon,” said Edward Moya, senior market analyst at Oanda.
“The oil market is likely to remain tight, but if China jitters intensify, Brent crude could still drop a few dollars.”
China’s gross domestic product expanded by an annual 6.3 per cent in the second quarter, below analysts’ estimates of more than 7 per cent growth.
The International Monetary Fund estimates China's economy will grow by 5.2 per cent in 2023, following a 3 per cent expansion in 2022, as it benefits from a full reopening this year.
Meanwhile, global oil supply plunged by 910,000 bpd to 100.9 million bpd in July amid a sharp reduction in Saudi Arabia’s output, the IEA said.
Earlier this month, the world’s largest oil exporter said it would extend its voluntary oil production cut of one million bpd until September.
The cut, which first took effect in July, could be further "extended and deepened", the Saudi Press Agency reported, citing an official source from the kingdom’s Ministry of Energy.
Russia, which has pledged to lower its oil output by 500,000 bpd until year-end, will cut oil exports by 300,000 bpd in September.