WTI Falls 2%, USD Rises Amid China Growth Concerns

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange accelerated losses in market-on-close trade Monday, with the U.S. crude benchmark briefly falling below $70 barrel (bbl) amid a strengthening U.S. Dollar Index and risk-averse sentiment across financial markets triggered by concerns over the potential collapse of China's indebted real estate developer Evergrande and expectations the U.S. Federal Reserve would this week announce steps to gradually withdraw pandemic-era monetary stimulus.

On the session, NYMEX October West Texas Intermediate futures tumbled $1.68 for a $70.29 bbl settlement after trading as low as $69.86 bbl, and next-month delivery November WTI settled the session with a $0.15 discount. Brent crude for November delivery finished a tad below $74 bbl, shedding $1.42 on the session. NYMEX October ULSD futures tumbled 5.01 cents or 2.5% to $2.1590 gallon and front-month RBOB futures declined 5.61 cents for a $2.1152 gallon settlement.

In financial markets, the Dow Jones Industrial Average fell 893 points or 2.58% to 33,690, extending its recent losses into a fifth consecutive week, while the broader S&P 500 dropped 2.65%. U.S. dollar, meanwhile, surged to a four-week high 93.256 against a basket of foreign currencies as investors fled into safe-haven markets amid concerns over global growth.

Headlines out of China dominated media Monday, suggesting an imminent collapse of indebted real estate developers Evergrande and potential spillover effect into other areas of the Chinese economy. Real estate accounts for about 15% to 20% of China's gross domestic product. Evergrande faces default this week on at least $150 million in bond payments and officials in Beijing have so far refused to commit any rescue cash for the indebted property developer. Evergrande employs over 200,000 people and has 1,300 real estate projects across China.

Growth across a range of Chinese economic indicators pulled back sharply in August, as regulatory crackdown on private sector and a new outbreak of the COVID-19 Delta variant weighed heavily on economic activity.

China's new home sales fell 19.7% in August from a year ago, the largest drop since April 2020 -- the height of the pandemic, according to data released by China's National Bureau of Statistics. Retail sales, a key gauge of China's consumption, rose just 2.5% in August from a year earlier, down sharply from July's 8.5% growth rate.

Domestically, investors are awaiting the key Federal Open Market Committee meeting scheduled for Tuesday and Wednesday, with expectations for policymakers to discuss their first step in pulling back pandemic-era emergency stimulus. FOMC meeting will conclude at 2 p.m. EDT Wednesday, and Chairman Jerome Powell is scheduled for a news conference at 2:30 p.m. EDT when he is expected to provide details on the timeline for tapering $120 billion a month in bond and mortgage-backed securities purchases. The details will be accompanied by a fresh set of projections for U.S. economic growth, unemployment and inflation, and expectations for when interest rates may begin to rise from today's near-zero levels.

Although the rise in consumer prices moderated in recent months, the progress in the labor market should prompt the U.S. central bank to start tapering its bond purchasing program in November, according to a market consensus. Powell said in a recent speech during a Jackson Hole, Wyoming, forum that he believed "if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. I think it's clear that we have made substantial further progress on achieving our inflation goal," Powell said. "There has also been very good progress toward maximum employment."

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges