Oil Prices Dip as China’s Weak Demand Overshadows 125K BPD Supply Risk from Storm

Oil prices edged lower on Tuesday, as weak demand from China overshadowed supply disruptions caused by Tropical Storm Francine.

Tropical Storm Francine is forecasted to strengthen into a hurricane, with the National Hurricane Center (NHC) warning that the storm could significantly disrupt oil production in the Gulf of Mexico.

ExxonMobil shut down production at its Hoover offshore platform, while Shell and Chevron paused operations at multiple locations. In total, about 125,000 barrels per day (bpd) of oil production capacity is at risk due to the storm.

However, weak demand signals from China, the biggest importer of crude, have largely overshadowed the impact of these disruptions. Recent economic data revealed that China’s domestic demand remains fragile, despite a slight acceleration in consumer inflation in August.

Key Factors Driving Oil Price Movements:

Tropical Storm Francine: Potential disruptions of 125,000 bpd from Gulf of Mexico oil platforms.
Chinese Economic Data: Weak domestic demand and worsening producer price deflation continue to weigh on oil markets.
Global Oil Oversupply: Concerns about oversupply persist as oil inventories remain high.

Chinese Demand Concerns Dominate Market Sentiment

The Chinese economy continues to cast a shadow over global oil demand, with growth in crude imports slowing significantly in 2023.

Goldman Sachs analysts noted that China’s annual demand growth has decelerated from 500,000-600,000 bpd in the years before the COVID-19 pandemic to just 200,000 bpd today.

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China's oil demand growth has decelerated to about 200,000 barrels per day (bpd) annually, down from 500,000-600,000 bpd pre-COVID, due to increased electric vehicle (EV) adoption and LNG use in trucks, as noted by Goldman…

— Top Rank Capital (@toprankcapital) September 9, 2024

This reduced demand comes as China transitions toward lower-carbon fuels and grapples with a sluggish post-pandemic economic recovery.

In addition, global oil supply is expected to remain elevated. Traders from Gunvor and Trafigura, speaking at the Asia Pacific Petroleum Conference (APPEC), predicted that oil prices may range between $60 and $70 per barrel in the coming months due to weaker Chinese demand and the persistent risk of oversupply.

Global Demand and Supply Outlook:

Goldman Sachs: China’s demand growth has slowed to 200,000 bpd, compared to pre-pandemic levels of 500,000-600,000 bpd.

Gunvor and Trafigura Forecast: Oil prices could range between $60 and $70 per barrel due to oversupply and weaker Chinese demand.

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OPEC and EItA reports: Markets are waiting for updates from the Organization of the Petroleum Exporting Countries (OPEC) and the U.S. Energy Information Administration (EIA) for more insights into future supply and demand trends.

WTI Crude Oil Technical Outlook

WTI crude oil continues to struggle below the $70.52 level, weighed down by concerns over global supply and weakening demand.

The price is currently consolidating near $67.79, showing a bearish trend below the 50-day Exponential Moving Average (EMA) at $70.52. The Relative Strength Index (RSI) is at 37.22, signalling continued selling pressure.

Immediate resistance is at $68.92, which aligns with a descending trendline from early September. A break above this level could challenge the bearish outlook, though resistance at $70.08 and $71.27 would present further hurdles.

Immediate support lies at $67.38, with additional support at $66.30 and $65.07. If prices break below $67.38, this could signal a continuation of the downtrend, pushing WTI toward lower support levels.

Conclusion

Tropical Storm Francine’s disruptions to supply and weak demand from China, the world’s largest crude importer, are currently pulling oil prices in two different directions.

While supply risks in the Gulf of Mexico offer short-term support to oil prices, concerns about global demand, particularly from China, remain a bearish factor.

Prices are likely to stay low unless demand shows signs of recovery,, as Chinese economic conditions and potential supply shocks will continue to have a significant impact on the oil market.

WTI crude remains bearish below $68.92, and any failure to break above this level could lead to further downside, with key support at $66.30.