Oil prices experienced a drop despite the risks in the Middle East due to fears regarding China’s demand for oil.
The declining economy and the real estate crisis in China have affected the oil market, causing prices to fall.
On Monday, Brent crude futures fell by $1.15, settling at $82.40 a barrel, while U.S. West Texas Intermediate dropped by $1.23 to $76.78.
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- Oil Prices Drop Over $1 on China’s Property Crisis
- Hong Kong court orders liquidation, deepening China’s real estate crisis.
- Escalating events in the Middle East lose prominence as focus shifts to China’s economic challenges
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Oil Prices Plunge as China Property Crisis Overrides Middle East Tensions
The drop is because a Hong Kong court ordered the liquidation of China Evergrande Group, a debt-laden property developer.
This development exposed cracks in the world’s second-largest economy and top oil importer.
Earlier data had already indicated a slowdown in Chinese factory activity.
John Kilduff, the partner at Again Capital LLC, said, “The situation in China is the biggest headwind to the whole market. That is why the market keeps backing off the war risk premium.”
Earlier on Monday, both benchmarks had risen over 1.5% after a missile in the Red Sea struck a fuel tanker.
Meanwhile, U.S. troops came under attack near the Syrian border, which marked a severe escalation of Middle East tensions.
Despite the heightened geopolitical instability, the oil supply cushion has yet to be disrupted.
This led traders to question whether the risk premium is overblown relative to underlying demand drivers.
“The current premium of around $10 a barrel should really just be $3 or $4 based on true petroleum demand fundamentals,” said Gary Cunningham, the director at Tradition Energy.
Meanwhile, high-interest rates continue to cast a shadow.
European Central Bank policymakers failed to reach a consensus on the timing of rate cuts.
A tighter monetary policy aims to tame inflation but risks triggering an economic downturn and oil demand destruction.
On the supply side, Russia is poised to curb naphtha exports by up to a third after fires hit Baltic and Black Sea refineries.
This could tighten markets despite gloomy demand signals.
Analysts expect a drawdown in crude and distillates.
At the same time, gasoline inventories are seen rising, according to API’s U.S. inventory report today and the EIA’s official numbers tomorrow.
China’s woes will likely continue to weigh on trader sentiment.
Any indication of significantly stronger or weaker demand from the world’s manufacturing powerhouse will impact oil prices.
The supply cushion remains intact for now, limiting the risk premium despite simmering Middle East tensions.
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