Oil Drops in China, Fed Tug-of-War continues By

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By Barani Krishnan — Pitting the Fed against China has become the oil trade’s favorite past-time of late.

Like in previous sessions on Monday, crude prices were affected by soft demand from China for oil in a COVID-trapped China. 

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 crude settled at $84.58 a barrel, down 47c, or 0.6%. It fell nearly $2.40, or 3.3%, earlier in the session to an intraday low of $82.67.

London-traded crude settled at $93.26 per barrel, down 24 cents or 0.3% The global crude benchmark was just below the $90 support earlier, touching a session low at $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 predict an annualized economic increase of 3% for the third-quarter, following two consecutive quarters that were marred by contraction in the first quarter.

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

In comments by Stocksak, Phil Flynn, an analyst from Price Futures group, suggested that this weakening could mean that Fed’s interest-rate increases to fight have been successful and may persuade the Fed to slow down its rate hike policies. This is a positive sign for fuel demand.

Flynn, an oil bull and avowed oil bull, said that the PMI miss is a sign that the economy might be slowing down.

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. China has been a key reason.

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.

ING analysts wrote in a note that there was uncertainty about China’s zero-COVID policies and a property crisis, despite better than expected growth in the country. This could undermine the effectiveness of progrowth measures.

These data were released a day after China’s Xi Jinping won a record-breaking third term as its leader. This cements his position as the country’s most powerful ruler ever since Mao Zedong.

China’s crude imports of crude oil rose from August to 9.79 million barrels per daily in September, but were 2% lower than the same period a year ago, customs data showed Monday. This was due to a reduction in throughput by independent refiners amid low margins and low demand.

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

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