Oil futures retreated from multi-week highs on Monday, driven by weaker-than-expected consumer spending in China, the world’s largest oil importer. Investors also paused buying activity in anticipation of the U.S. Federal Reserve’s interest rate decision.
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Brent crude futures settled at $73.91 per barrel, a decrease of 58 cents or 0.8%, after reaching their highest settlement since November 22nd on Friday. U.S. West Texas Intermediate (WTI) crude settled at $70.71 a barrel, also down 58 cents or 0.8%, following its highest close since November 7th.
Factors Contributing to Oil Price Decline
The recent rally in oil prices, fueled by expectations of tightening supply due to sanctions on Russia and Iran, coupled with potential interest rate cuts in the U.S. and Europe, appears to have reached a plateau. According to Jim Ritterbusch of Ritterbusch and Associates, “Last week’s events have been appropriately priced, and this week offers fewer catalysts for oil price support.”
Disappointing retail sales figures from China, signaling a sluggish economic recovery and persistent pressure from U.S. trade tariffs, weighed heavily on oil prices. Bob Yawger, director of energy futures at Mizuho in New York, characterized the situation as “a very bearish scenario with limited hope for crude oil demand growth.”
This weak demand outlook contributed to the decision by OPEC+, the oil producer group, to delay planned production increases until April. John Evans of oil broker PVM highlighted the lack of consumer confidence in China’s economic stimulus measures, stating that “without a significant shift in personal spending, China’s economic prospects will remain constrained.”
Market Uncertainty and Future Expectations
Market participants also engaged in profit-taking ahead of the Federal Reserve’s upcoming interest rate decision. IG market analyst Tony Sycamore noted that the 6% price surge last week made some profit-taking expected, particularly with many financial institutions closing their books for the holiday season.
The Federal Reserve is widely anticipated to announce a quarter-percentage-point interest rate cut at its December 17-18 meeting. The accompanying economic projections will provide insights into the potential extent and duration of future rate reductions, possibly extending into 2025 and 2026. Lower interest rates can stimulate economic activity and potentially boost oil demand.
Further downward pressure on oil prices came from a strengthening U.S. dollar, which briefly neared a three-week high against other major currencies. The inverse relationship between the dollar and commodity prices, including crude oil, contributed to the decline.
Looking Ahead: Inventory Reports and Continued Volatility
Market attention now turns to this week’s U.S. oil inventory reports for further direction. A preliminary Reuters poll suggests a likely decrease in crude oil and distillate inventories, while gasoline stocks are expected to have risen. The American Petroleum Institute will release its report on Tuesday, followed by the Energy Information Administration on Wednesday. Four analysts polled by Reuters anticipate a crude inventory reduction of approximately 1.9 million barrels for the week ending December 13th.
These factors combined to create a day of cautious trading in the oil market, with prices pulling back from recent highs. The interplay between Chinese economic data, Federal Reserve policy decisions, and upcoming inventory reports will likely continue to influence oil price volatility in the coming days.
