Oil prices plunged to a two-week low in Asian trading due to mounting concerns about China’s economic slowdown and a strengthening dollar driven by the Federal Reserve’s hawkish signals. Despite larger-than-expected U.S. inventory drawdowns, oil prices continued their decline, while U.S. production surged to pre-COVID levels.
China’s Economic Woes and Fed Hawkishness Trigger Oil Price Decline
Despite significant U.S. crude inventory reduction, the Energy Information Administration (EIA) revealed that U.S. oil production approached pre-pandemic highs. Fears of China’s economic slowdown intensified as the country grapples with weak economic indicators and a looming real estate crisis.
The hawkish stance from the Federal Reserve’s July meeting lifted the dollar to near two-month highs, further impacting crude prices. Concerns deepened with Japan’s lackluster trade data, highlighting the potential for a global economic downturn, particularly in China.
Brent oil futures fell by 0.2% to $83.13 per barrel, while West Texas Intermediate crude futures dropped 0.4% to $79.03 per barrel. Both contracts hit their lowest levels in two weeks, marking a fourth consecutive session of decline.
The Fed’s minutes demonstrated unanimous support for combating persistent inflation through higher interest rates. This, coupled with the central bank’s prior rate hike, elevated the dollar, putting pressure on international oil markets. The anticipation of more rate increases added to concerns over tightening monetary conditions and their impact on demand.
In the backdrop of falling oil prices, U.S. crude inventories experienced an unexpected drawdown. Despite this, U.S. crude production reached a three-year high of 12.7 million barrels per day, nearing the record of 13.1 million barrels produced before the pandemic.
The surge in U.S. production countered efforts by Saudi Arabia and Russia to cut production, which previously spurred an oil price rally. These factors, combined with China’s bleak economic outlook, weighed heavily on oil prices.
China, the world’s top oil importer, is expected to introduce stimulus measures, including a potential interest rate cut, to reignite growth.