Oil posts first weekly loss since June amid China economic concerns

Crude futures ended seven straight weeks of gains

Pedestrians in central Shanghai. China's central bank has cut key policy rates for the second time since June in a bid to revive sagging economic growth. EPA

Oil prices settled higher on Friday but posted their first weekly loss since June, snapping a seven-week winning streak, amid concerns about China’s economic growth and fears of further monetary tightening.

Brent, the benchmark for two thirds of the world’s oil, rose 0.81 per cent, to settle at $84.80 a barrel. West Texas Intermediate, the gauge that tracks US crude, added 1.07 per cent close at $81.25.

For the week, both Brent and WTI retreated about 2.3 per cent.

“The oil price rally that has been in place since June has ended. Energy traders will focus on the latest problems from China, the global flash purchase manager's indexes, the Jackson Hole Symposium, and the BRICS summit," said Edward Moya, senior market analyst at Oanda.

“Fears that the [US Federal Reserve] will overtighten are back and uncertainty persists on how the US consumer will behave once all their Covid savings disappear and as student loan debt bills come due.

"If the global economic outlook become even more pessimistic, oil might give up a good portion of the recent rally."

The number of Americans filing fresh claims for jobless benefits fell by 11,000 to 239,000 in the week ending on August 12, the Labour Department said on Thursday.

The drop in jobless claims suggests the labour market in the world’s largest economy remains in “fairly good” health despite the Fed’s rate increases, Edward Bell, senior director of market economics at Emirates NBD, said.

“Initial jobless claims have trended higher since the start of the year which aligns with the slowdown in hiring,” Mr Bell said.

Fed policymakers continue to see “significant upside risks” to inflation that may require more monetary tightening, minutes released from the central bank's most recent meeting showed.

The minutes from the Fed's July 28 and 29 meeting said that “a couple of participants” indicated a preference for leaving rates unchanged or signalled they would support a proposal to do so.

Last month, the Fed raised US interest rates by 25 basis points, its 11th increase since March 2022, as part of its efforts to lower inflationary pressure on the nation's economy.

This brought the Fed's benchmark rate to the target range of 5.25 per cent and 5.5 per cent, the highest in 22 years.

The central bank's next meeting will be held on September 19 and 20.

Higher interest rates could impede economic growth, lowering crude demand.

Oil has gained for seven straight weeks on a tightening crude market, but fresh concerns about China’s economic growth have weighed on futures this week.

Earlier this week, China’s central bank cut key policy rates for the second time since June in an attempt to revive sagging economic growth.

China’s industrial output and retail sales grew at a slower pace in July, compared with June, according to data from the National Bureau of Statistics

Meanwhile, the world’s second-largest economy has officially fallen into deflation, with both consumer and producer prices declining in July compared with a year ago.

Despite growing concerns about the country’s economy, China’s refiners processed about 14.9 million barrels per day of crude in July, up more than 31 per cent from the same period a year earlier, MUFG, Japan’s largest lender, said in a research note on Thursday.

“Looking ahead, we believe the impressive rebound in oil prices may lose some steam in the near term, as rising prices are expected to help boost production in the US,” said Ehsan Khoman, head of commodities, ESG and emerging markets at MUFG.

“On the demand side, risks stem from lower than anticipated Chinese stimulus. Hedge fund managers are cutting net bullish bets after exuberance since end-June,” Mr Khoman said.

“Hence, we expect the current seven successive weeks’ rally to cool down in the short term.”

However, Swiss lender UBS has raised its oil price forecast for this year on the back of additional supply cuts by Saudi Arabia and Russia.

UBS now expects Brent to trade at $95 a barrel by the end of December, up from its previous estimate of $90 a barrel.

The oil market is projected to be in a deficit of two million bpd this month and 1.5 million bpd in September as the two Opec+ members extend their production cuts, according to UBS.