OIL FUTURES: Crude drops on slowing Chinese economy, demand weakness

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Crude futures traded lower in midmorning trade in Europe on Aug. 1, as markets reacted to weakened economic activity in China with the Caixin PMI dropping to 50.4 in July.

At 1107 GMT, October ICE Brent futures were down $1.40/b at $102.57/b, while September NYMEX WTI futures were $1.75/b lower at $96.87/b.

China’s manufacturing PMI dropped to 50.4 in July from 51.7 in the previous month, according to media reports Aug. 1. This is below market analysts’ expectations of 51.5 for July but above the 50-point index mark that separates growth from contraction, they added.

Market analysts said the drop is a result of weakened economic activities in various industries in China and remained cautious about China’s demand recovery.

“According to the official press release, industries in contraction include textiles, oil, coal processing, ferrous metal smelting and rolling processing. Ferrous metals are popular in building construction. As such, the recent event of uncompleted real estate projects could be at least part of the reason leading to the contraction of manufacturing activities”, said Iris Pang from ING Bank in a research note on Aug. 1.

Recent dovish comments from the US Federal Reserve have further weighed on crude oil prices. The most recent benchmark rate hike of 75 basis points on July 27 has demonstrated the Fed’s commitment to bring inflation in line to the 2% long-term target.

“We are committed to bringing inflation down and we’re going to do what we need to do… we are a long way away from achieving an economy that is back at 2% inflation, and that’s where we need to get to,” Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, highlighted in a media interview on July 31.

Those comments came after the US slithered into a technical recession with Q2 GDP shrinking at 0.9% compared to the previous year.

“The US economy contracted for the second straight quarter in Q2, which is a textbook definition of a recession,” ANZ Research Analyst Tom Kenny said in a note Aug. 1.

Source: Spglobal.com