DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange declined Tuesday, with July West Texas Intermediate pressing below $70 during intraday trade. The decline came amid a strengthening U.S. dollar index after federal data showed a housing market rebound continued for a second straight month in May, with new home construction surging by the most since 2016, suggesting residential construction could be fueling economic growth.

The housing market is thought to be the most interest rate sensitive sector of the economy and serve as a "canary in the coalmine" for the rest of the economy when the housing index fell into contraction earlier in the year. However, figures released Tuesday morning by the U.S. Census Bureau show that while existing home sales fell in April and are expected to have again eased in May when new data is released on Thursday, new home construction starts jumped 21.7% month-over-month to a 1.63 million annualized rate compared to median estimates of just 10%. Applications to build, a proxy for future construction, also climbed 5.2% to an annualized rate of 1.49 million units.

After the report, the Atlanta Fed GDPNow forecast residential investment will add slightly to the gross domestic product estimates for the second quarter. Homebuilding last contributed to growth in the first quarter of 2021.

This might be good news for the economy but not for the Federal Reserve that has tried to pour cold water on the economy with the most aggressive rate hiking campaign in decades. On June 14, the Federal Open Market Committee paused increases in the federal funds rate at a 5% to 5.25% target range but signaled more hikes are needed to slow the red-hot labor market along with aggregate demand.

Prospects of higher interest rates in the United States and European Union amid stubborn inflation have diminished buying interest for commodity space in recent weeks. Global crude benchmark Brent has fallen about 11% so far this year despite forecasts for a growing supply deficit following production cuts from OPEC+ and expectations for a post-COVID rebound in China's economy that has faltered.

At the recent G7 meeting in Japan, leaders of rich and industrialized nations stressed the importance of "de-risking" commercial ties with China, albeit stopped short of calling for "de-coupling." Chinese authorities in recent weeks stepped up surveillance of foreign firms in connection to data privacy and intellectual property, deterring global business and undermining its own interests. A long list of prominent U.S., EU and Japanese firms have already begun to move some of their production chains out of China, while others are seriously considering doing so. Apple has scheduled the production of its AirPod Pro 2 for Vietnam and not China. Volvo rejected China for a new factory and will build it instead in Slovakia. As foreign business leaves China's shores, youth unemployment spiked to a record-high 20.8% in May, highlighting structural issues in China's labor market.

Against this backdrop, China's move to cut two key interest rates by a modest 10 basis points fades in comparison to mounting problems the economy is now facing.

China's growth has consistently been downgraded throughout this year, with the latest revision coming from Goldman Sachs, which cited turbulence in property markets and high unemployment when cutting its 2023 GDP forecast to 5.4% from 6%. While the investment bank sees further stimulus to come, it notes that the measures will not be enough to overcome the greater problem that it faces: weakened sentiment.

"With continued challenges from the property market, pervasive pessimism among consumers and private entrepreneurs, and only moderate policy easing to partially offset the strong growth headwinds, we mark down our 2023 real GDP forecast," economists led by Chief China Economist Hui Shan said in a research note Sunday.

China's economic data released earlier this month showed retail sales eased markedly over the past two months, and industrial production increased only marginally compared to last year amid a sharp slowdown in exports.

NYMEX July West Texas Intermediate futures expired $1.28 lower at $70.50 per barrel (bbl) before sliding to $69.65 per bbl in intrasession low, while next-month August contract settled the session at $71.19 per bbl. International crude benchmark Brent for August delivery declined to $75.90 per bbl, down a modest $0.19 per bbl. NYMEX July ULSD futures dropped back $0.0760 to $2.4754 per gallon, and NYMEX July RBOB futures fell to $2.6092 per gallon, down $0.0713 per gallon.

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