Brent sheds on lingering concerns over slow demand growth in China

The front-month ICE Brent contract lost $1.00/bbl on the day, to trade at $84.16/bbl at 09.00 GMT.

PHOTO: Getty Images

Upward pressure:

Brent futures gained support amid growing expectationsthat the US Federal Reserve (Fed) will begin cutting interest rates from September this year.

Fed chairman Jerome Powell said on Monday that the central bank has grown confident about the US inflation gradually cooling down in the second quarter of 2024, Reuters reported. Powell further said that the Fed’s 2% inflation target can be soon achieved.

Market optimism was buoyed after Powell said that “US data between April and June ‘do add somewhat to confidence’ that inflation will return to the Fed’s 2% target,” VANDA Insights’ founder and analyst Vandana Hari remarked.

Analysts at Citi Bank predicted earlier this week that the US Fed could cut interest rates by 200 basis points in its next eight meetings, according to multiple reports.

Citi Bank’s analysts expect the Fed to slash interest rates between September this year and July next year. They expect the Fed to trim the benchmark interest rate from the current levels of 5.25-5.5% to 3.25-3.5%.

Lower interest rates in the US can make dollar-denominated commodities like oil more affordable, supporting demand growth.

Downward pressure:

Brent’s price declined as the global oil market grew wary about China’s oil demand growth. The recently released weak macroeconomic data from China added to the downward pressure on Brent futures.

China's gross domestic product (GDP) grew by 4.7% in the second quarter of this year, down from the 5.3% growth rate recorded in the previous quarter.

“Oil prices declined as traders evaluated signs of weak demand… in China, the world's largest crude consumer, as the country's GDP slowed to 4.7%, the lowest in five quarters,” analysts from Saxo Bank noted.

The US dollar is “bouncing back” after a failed assassination attempt on Republican US presidential candidate Donald Trump, according to analysts. The odds of Trump getting re-elected as the 47th President of the US is “climbing”.

“In broader markets, a stronger USD emerged as investors ratchet up bets that Trump will win back the White House. This dented investor appetite across the commodity complex,” ANZ Bank’s senior commodity strategist Daniel Hynes said.

A stronger US dollar makes commodities like oil costlier for non-dollar holders, ultimately denting demand in the market.  

“With ICE Brent settling below US$85/bbl [on the day], USD strength and Chinese demand worries were clearly the dominant drivers,” two analysts from ING Bank said.

By Aparupa Mazumder

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