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Crude Oil Crisis: Prices Tumble Over China's Economic Woes and a Rising U.S. Dollar

Oil prices dropped sharply on Monday as concerns grow over China's economic recovery and a strengthening U.S. dollar, reflecting uncertainty in the global economy.


Oil Prices Retreat Amid China's Economic Concerns and U.S. Dollar Strength

Crude oil prices retreated Monday, pressured by renewed concerns over China’s economic recovery as well as a stronger U.S. dollar. By 09:10 ET (13.10 GMT), the U.S. crude futures traded 1.1% lower at $82.30 a barrel, while the Brent contract dropped 1% to $85.95.

China's Property Sector Struggles Hinder Economic Recovery

Property woes slow China’s economic recovery. Chinese residential real estate giant Country Garden (HK:2007) suspended trading in more than ten of its onshore bonds on Monday, sparking a sell-off in the company's Hong Kong-listed shares given the signs of stress in the country's ailing property sector. This is another headwind slowing the recovery of the Chinese economy from its COVID hit, an economy that was meant to be the source of the majority of crude demand growth this year given the aggressive monetary tightening that many of the western economies were struggling with.

China: The World's Largest Crude Importer Faces Economic Challenges

China is the second largest economy in the world and is also the largest importer of crude. While government officials have promised to roll out more stimulus measures to support growth, they have provided few actual details on how said stimulus will be unlocked. The focus this week is now on retail sales and industrial production data, due on Tuesday. Both readings are expected to have declined further in July.

U.S. Dollar’s Impact on Crude Prices

Dollar strength hitting crude. The strength of the U.S. dollar is also hurting the oil markets, with the greenback sitting at a five-week high after last week’s inflation readings provided more ammunition for the Federal Reserve to keep interest rates higher for longer. A stronger dollar makes commodities priced in the greenback, like crude, more expensive, likely hitting demand among international buyers.

Oil Markets See Gains Amid Tightening Supply

Seven consecutive positive weeks. All that said, the oil markets have just registered seven weeks of gains on tightening supply after output cuts from primarily Saudi Arabia and Russia, under the umbrella of lower production targets by the Organization of Petroleum Exporting Countries and its allies, a group known as OPEC+. “Sentiment remains largely positive with the oil balance set to continue to tighten, while stronger refinery margins are also providing some support,” analysts at ING said, in a note.

Market Speculation Indicates Possible Correction

That sentiment could be changing, though, as speculators have become reluctant to add to their positions, reducing their net long positions in Brent over the last reporting week. This suggests the market could now be in an overbought situation, with a correction possible in the coming days.