Oil Markets At The Crossroads As China Underperforms

Key Insights

• Weak economic data from China serves as the key catalyst for the current pullback in the oil markets. 
• OPEC+ production cuts failed to push prices higher as demand for oil is weaker than previously expected. 
• A move below the key support area may lead to a strong sell-off in the oil markets. 

The strong rebound of the Chinese economy, OPEC+ production cuts and the start of the driving season were supposed to push oil prices to higher levels. However, oil markets are moving towards yearly lows. What’s going on?

China’s Growth Missed Expectations

China’s recovery from COVID lockdowns is weaker than expected. The country’s Industrial Production grew by 5.6% year-over-year in April, compared to analyst consensus of +10.9%. Retail Sales grew by 18.4% in April, which was not surprising as last year’s sales were suppressed by COVID lockdowns. While the growth looked impressive, it missed the analyst estimates of +21%.

The Chinese economy is underperforming due to the weak demand from Europe, which continues to suffer from the recent energy crisis, and the weak demand at home. China’s residents are not ready to spend too much money after the COVID crisis, and the country’s government will likely introduce various measures to boost domestic spending. However, such measures take time to work, so demand for oil in China will not be as strong as previously expected in the upcoming months.

OPEC+ Fears Recession

OPEC+ countries have shown that they are determined to push prices to higher levels this year. However, it looks that OPEC+ production cuts are a reaction to the real situation in the markets. Demand is weak so OPEC+ countries are forced to cut production to prevent prices from falling to lower levels in case of a recession in developed countries.

In addition, Russia’s oil production remains resilient despite sanctions and the negative impact of the oil price cap scheme. This is another major surprise for the market that believed that some volumes from Russia would be cut.

Oil Markets Reached A Key Point

WTI oil gets strong support in the $66 – $68 area, while Brent oil enjoys support between $70 and $72. In case WTI oil and Brent oil settle below these support areas, a strong sell-off may follow. Once the support levels are breached, oil markets will need strong catalysts to gain sustainable upside momentum.

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