Oil futures: Crude down 2% as weak China data offsets Middle East tensions

Quantum Commodity Intelligence – Crude oil futures Wednesday were in retreat after weak data from China weighed on markets, but benchmarks were heading for the first monthly gains since September as geopolitical tensions underpinned the broader January price recovery.

Apr24 ICE Brent futures were trading at $80.60/b (1825 GMT), compared to Tuesday's settle of $82.50/b, while Mar24 was last traded $81.75/b at the expiry.

At the same time, Mar24 NYMEX WTI was trading $75.85/b versus Tuesday's settle of $77.72/b.

Oil prices eased back from early highs as data showed China's manufacturing activity contracted this month, coming after China's financial sector was still reeling from the liquidation order against fallen property giant Evergrande.

"The Chinese manufacturing sector remains under pressure amid a weak domestic recovery and poor external demand," said Lynn Song, chief economist at ING, noting manufacturing PMI has been below 50 for nine of the past 10 months, with January at 49.2.

Prices retreated further later in the session after the EIA reported US nationwide commercial crude inventories increased by 1.2 million barrels last week to 421.9 million, its first weekly rise since the start of the year.

But an escalation in tensions around the Middle East helped crude prices to the first monthly gains in four, although the conflict to date has not directly impacted energy production, which analysts say is keeping a lid on what would otherwise be a higher risk premium.

Ninepoint Partners' Eric Nuttall said only a direct supply hit will significantly increase energy prices from current levels. "Unless we see an actual supply loss, not just an extension of voyage times, there is unlikely to be a (further) premium on oil prices due to geopolitics," he told CNBC.

Response

Markets were on alert for the US response after last weekend's deadly drone strike on a US airbase, killing three military personnel in Jordan.

President Joe Biden said he had decided how the US would respond but did not elaborate in his remarks at the White House, only adding, "I don't think we need a wider war in the Middle East."

Markets earlier brushed off latest data from the American Petroleum Institute which showed crude inventories declined by 2.5 million barrels last week as crude output struggled to return to full capacity after winter storms. Gasoline inventories were up 600,000 barrels, while distillate stocks dropped 2 million barrels.

Meanwhile, the International Monetary Fund has raised its forecast for global growth this year on better-than-expected expansion in the US and likely fiscal stimulus in China, although it flagged the risk of escalating conflicts and persistently high inflation.

The IMF predicted the world economy will grow 3.1% in 2024, up from its 2.9% prediction in October, while the Washington-based institution kept its 2025 forecast unchanged at 3.2%.