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China's Dim Economic Outlook & Strong US Dollar Pulls Down Oil Prices

In light of the strong US dollar and weak data from China, global oil prices experienced a significant dip on Wednesday.

Overturned barrel of crude oil
Overturned barrel of crude oil

Impact of China's Weak Economic Data on Oil Prices

Wednesday saw a decline in oil prices, driven by a potent mix of a strong US dollar and disappointing data from China, the world's leading oil importer, stirring up apprehension around demand. Brent crude futures for August delivery dropped by 73 cents, marking a 0.99% decline, to settle at $72.98 a barrel at 1353 GMT. Concurrently, US West Texas Intermediate crude (WTI) slipped by 90 cents or 1.3% to reach $68.56. Earlier in the session, both benchmarks experienced an over $2 drop, and a more than 4% decrease was registered on Tuesday.

China's Manufacturing Sector: A Decrease in Demand

China's manufacturing activity in May diminished faster than predicted, indicating a drop in demand. The official manufacturing purchasing managers' index (PMI) stood at 48.8, a decrease from 49.2 in April. This decline fell behind the projected 49.4, suggesting weaker-than-anticipated demand.

Rising US Dollar Exerts Pressure on Oil Demand

Additional pressure on oil prices originated from the increasing strength of the US dollar, which renders commodities more expensive for buyers using other currencies. The dollar index, a measure of the US currency against six major counterparts, found support from a slowdown in European inflation and the progression of a bipartisan US debt ceiling bill. This bill is set to advance to the House of Representatives for debate on Wednesday. A stronger May non-farm payrolls number in the US, expected on Friday, could potentially lead to further dollar gains, thereby increasing the odds of the Federal Reserve upping rates again in June.

Market Uncertainty Ahead of the OPEC+ Meeting

The market remains on high alert in preparation for the forthcoming OPEC+ meeting on June 4. OPEC+, a group comprising the Organization of the Petroleum Exporting Countries and allies such as Russia, has been sending mixed signals concerning possible further cuts in oil production. These mixed signals have stirred up recent volatility in oil prices. However, despite the recent slump in prices, prominent banks such as HSBC and Goldman Sachs, along with market analysts, predict no further cuts to be announced at the upcoming meeting.

Optimistic Forecast for the Second Half of the Year

HSBC noted on Wednesday that stronger oil demand from China and the West from the summer onwards would likely lead to a supply deficit in the year's second half. Echoing this, PVM oil market analyst Stephen Brennock suggested, "The most likely action is inaction" about the OPEC+ decision.

Separate reports reveal that US crude oil and gasoline stockpiles likely fell last week. At the same time, distillate inventories are believed to have risen, according to a preliminary Reuters poll conducted on Tuesday. These updates are in anticipation of reports from the American Petroleum Institute, due for release at 4:30 p.m. EDT on Wednesday.