Oil edges higher after falling more than 3% on China demand concerns

Buildings across Huangpu River in Shanghai. China’s non-manufacturing PMI fell to 50.6 in October from 51.7, indicating a slowdown in its construction and services sectors. Bloomberg

Oil prices edged higher on Tuesday after concerns about China’s fuel demand dragged crude lower by more than 3 per cent the previous day.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.77 per cent higher at $88.82 a barrel at 11.13am UAE time while West Texas Intermediate, the gauge that tracks US crude, was up 0.70 per cent at $82.79 a barrel.

On Monday, Brent settled 3.35 per cent lower at $87.45 a barrel. WTI closed down 3.78 per cent at $82.31 a barrel.

“As Middle East crude supply concerns ease, demand destruction is happening and it could get a lot worse if the bond market sell-off returns,” said Edward Moya, a senior market analyst at Oanda.

“If global bond rates end much higher, that will be consider uncomfortable levels that will crush both the short-term growth prospects and the crude demand outlook,” Mr Moya said.

Traders were also concerned about fuel demand in China, the world’s second-largest economy and top crude importer, after the latest manufacturing and non-manufacturing activity data fell below market estimates.

The official purchasing managers' index dropped to 49.5 in October from 50.2 last month, falling below the 50-point level separating contraction from expansion, according to the National Bureau of Statistics.

Analysts polled by Reuters were expecting the index reading to remain at 50.2 points.

China’s non-manufacturing PMI also fell to 50.6 in October from 51.7, indicating a slowdown in its construction and services sectors.

The US Federal Reserve will meet today and tomorrow amid expectations that it will hold interest rates steady.

“Major central banks are likely at or near the end of their hiking cycles, with the Fed and the Bank of England expected to … keep interest rates unchanged this week,” Emirates NBD economists said in a research note.

“With inflation still well above target, a resilient US economy and energy prices posing an upside risk … we don’t expect rate cuts until mid-2024 at the earliest,” the bank said.

The Fed has raised interest rates 11 times to its current range of 5.25 per cent to 5.5 per cent to rein in price increases without driving the economy into a recession.

The World Bank on Monday said oil prices could rise to $157 a barrel in the near term if an escalation of the Israel-Gaza conflict results in a big crude supply disruption in the Middle East.

In a “large disruption” scenario, comparable to the Arab oil embargo of 1973, global supply would shrink by six million to eight million barrels a day, driving up prices to a range of $140 to $157 a barrel, the World Bank said in its latest Commodity Markets Outlook.

Under the World Bank’s baseline forecast, oil prices are projected to average $90 a barrel in the current quarter before declining to an average of $81 a barrel next year amid a global economic slowdown.

Updated: October 31, 2023, 7:20 AM