Oil Dips as China, Fed Tug-of-War Continues

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By Barani Krishnan

AiVIF.com -- Pitting the Fed against China has become the oil trade’s favorite past-time of late.

Like in recent sessions, soft demand for oil in a still-COVID-trapped China weighed on crude prices on Monday. 

But after an early plunge, the market recovered — ironically — on weak U.S. business activity data that suggested the Federal Reserve might back off from aggressive rate hikes by the year-end. This speculation by traders who — strangely — seem to know the Fed better than the Fed knows itself has kept the stock to oil markets afloat over the past week, when fundamentals — and animal spirits — suggested they should close lower.

New York-traded WTI settled down 47 cents, or 0.6%, at $84.58 a barrel. Earlier in the session, it fell almost $2.40, or 3%, to an intraday bottom of $82.67.

London-traded Brent crude settled down 24 cents, or 0.3%, at $93.26 per barrel. Earlier, the global crude benchmark went just under the $90 support, touching a session low of $89.05. 

“The market’s just not going anywhere; it’s either the Fed BS or China BS that you hear,” said John Kilduff, partner at New York energy hedge fund Again Capital. “The only thing that might move the needle will be the first reading for the U.S. third-quarter GDP on Thursday.”

Economists are projecting an annualized economic growth of 2.4% for the third quarter, after two consecutive quarters of contraction in the first half of the year.

In Monday’s session, crude prices came off their lows after S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 47.3 this month from a final reading of 49.5 in September.

That weakening could indicate that the Fed's interest rate increases to fight inflation have been working and may persuade it to slow its rate hike policies, a positive signal for fuel demand, Phil Flynn, an analyst at Price Futures group, said in comments carried by Reuters.

"The miss on the PMI number is a sign that the economy may be slowing a bit, which turns out to be bullish," said Flynn, an avowed oil bull.

Since OPEC+’s 2-million-barrels-per-day production cut pledge from three weeks ago that sent crude prices soaring 17% higher in just a week, bulls in the space have barely gotten anywhere. And one good reason for that has been China.

From yes-we-are-back-to-business-as-usual to no-we-are-closed-again-for-COVID, China’s flip-flops over coronavirus lockdowns have been an anathema for crude traders seeking demand clarity from the world’s largest oil importer.

China’s role in making life tougher than what it should probably be for oil longs was evident again on Monday after Beijing released much-delayed trade data that showed demand remaining lackluster in September as strict COVID-19 policy and fuel export curbs depressed consumption.

Uncertainty over China's zero-COVID policy and property crisis loomed despite better-than-expected growth in the country's third-quarter GDP, undermining the effectiveness of pro-growth measures, ING analysts said in a note.

The data came a day after China's Xi Jinping secured a precedent-breaking third leadership term on Sunday, cementing his place as the country's most powerful ruler since Mao Zedong.

Despite rising from August, China's crude imports in September of 9.79 million barrels per day were 2% below the amount brought in a year earlier, customs data showed on Monday, as independent refiners curbed throughput amid thin margins and uninspiring demand.

“You’ll hear today that China is reopening, only to hear next week that they’re re-closing,” said Kilduff of Again Capital.