Oil prices experienced a decrease of more than $1 on Wednesday, influenced by China’s economic growth falling slightly below expectations, raising uncertainties about future demand. Additionally, the strength of the U.S. dollar contributed to a decline in investor risk appetite.
Brent crude futures dropped $1.26, or 1.6%, reaching $77.03 per barrel by 1158 GMT, while U.S. West Texas Intermediate crude futures (WTI) were down $1.35, or 1.9%, at $71.05.
Despite ongoing naval and air conflicts in the Red Sea, concerns about potential disruptions to shipping routes, increased costs, and delayed deliveries have not been sufficient to support oil prices.
China’s fourth-quarter economic growth, expanding by 5.2% year-on-year, fell short of analysts’ expectations, leading to questions about the forecasts anticipating Chinese demand driving global oil growth in 2024. Analysts emphasize that the economic data doesn’t dispel challenges to crude oil demand, expressing a cautious outlook for China’s economy in 2024 and 2025.
However, signs of sustained Chinese demand are evident, with oil refinery throughput in 2023 increasing by 9.3% to a record high, surpassing some analysts’ projections.
Additionally, the U.S. dollar approached a one-month high on Wednesday, influenced by comments from Federal Reserve officials tempering expectations for aggressive interest rate cuts. A stronger dollar tends to reduce demand for dollar-denominated oil from buyers using other currencies.
“Higher rates can lead to a weaker outlook for oil demand as economic activity tends to cool in a high-interest-rate environment, leaving oil prices vulnerable,” noted Priyanka Sachdeva, senior market analyst at Phillip Nova.
In the U.S., oil refiners are anticipated to have 1.5 million barrels per day (bpd) of capacity offline for the week ending January 19, reducing available refining capacity by 954,000 bpd, as reported by research company IIR Energy.
Tensions in the Red Sea persist as the U.S. carried out fresh strikes against Iran-aligned Houthi militants in Yemen following a Houthi missile hitting a Greek vessel. While oil benchmarks may not immediately reflect the Red Sea attacks, the disruption to trade flows through the Red Sea and Suez Canal has led to an increased realized price for oil and oil products for consumers.
The interplay between economic concerns, geopolitical tensions, and currency dynamics continues to shape the landscape for global oil markets.
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