China’s Economic Weakness Push Crude Prices Down

Brent crude prices have experienced a 4.0% decline, reaching $80.48 per barrel. Earlier in the week, prices surged above the $84.00 resistance level, sparking hopes for an upward move toward $90.00 per barrel. However, the inability to sustain levels above the crucial $84.00 resistance and a subsequent drop below $82.00 indicate potential weakness in the uptrend and a possible decline to new lows.

Investors attribute the decline in fuel prices to economic weakness in China. Despite an increase in the Composite PMI to 50.9 points from the previous 50.3 points, China's industrial sector remains in contraction territory, with Manufacturing PMI still below 50.0 points, signaling weaker demand for fuel. While China is a key player in the global oil market, attention should also be given to the robustness of the U.S. economy. The U.S. demonstrates solid growth in GDP, business activity, and the labor market. The Federal Reserve (Fed) is attempting to temper expectations of interest rate cuts, with investor bets on such cuts dropping from 76% to 35.5% as of February 1.

 “I don’t think it’s likely that we’ll reach a level of confidence by the time of the March meeting . . . I don’t think that’s the base case,” Jerome Powell, a Chair of the Fed, told at the press conference after the meeting. Fed Chair Jerome Powell's comments suggest a cautious approach, and investors now anticipate a rate cut in May rather than March. This perception, combined with a sudden drop in U.S. 10-year Treasuries yields to 3.91% from 4.05%, could signal concerns about a possible inflation wave. The United States Oil Fund LP (USO) reported capital outflows for the third week out of the last five, totaling $60.1 million in January. This lack of confidence in further oil price increases contributes to a bearish outlook.

From a technical perspective prices are likely to go down too. The nearest support is at $72.00-75.00 per barrel of Brent crude. Alternatively, if prices could hold at $82.00-84.00 per barrel they may climb higher during the second half of February.