Oil Slide as China's Rate Cut Seen Short to Spur Growth

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange softened again early Tuesday after China's central bank unexpectedly cut one of its key interest rates to the lowest level since 2020 in an effort to kick-start growth after a slew of macroeconomic data for July badly missed expectations, pressuring sensitive commodities like iron ore and crude oil.

The People's Bank of China overnight slashed its one-year medium-term loans by 0.15% -- a larger-than-expected margin -- to 2.5%, while signaling that more stimulus measures likely to follow as authorities attempt to bolster the struggling economy. The rate cut follows another batch of bearish macroeconomic for July, showing its industrial production expanded by 3.7% from a year earlier, compared to 4.3% expected and retail sales gained 2.5%, also missing the consensus for a 4.2% increase. It increasingly looks like Chinese authorities are losing control of a narrative that domestic consumption, hammered by the lack of government stimulus and high youth unemployment, could be revived in the later part of the year.

Interestingly, the National Bureau of Statistics said it would suspend publishing data on the jobless rate for 16- 25-year-olds that skyrocketed to a record-high 21.3% in June. Economists widely forecast the jobless rate for that group to climb even higher through the end of the summer, as another batch of graduates enters the labor market.

On Monday, China's largest real-estate developer Country Garden suspended payments on its bond obligations in an apparent cash crunch that has sent its shares to record lows. Just last week, the company missed an August 7 deadline for making $22.5 million in coupon payments on two U.S. dollar-denominated bonds. If the company fails to pay investors by the end of a 30-day grace period, it will be in official default on the securities, each with a face value of $500 million.

Oil traders closely track the developments in China's property sector and the economy at large since Beijing is still one of the largest buyers of growth-sensitive commodities on the global market, including iron ore, coal and crude oil. The Organization of the Petroleum Exporting Countries estimated in its July Oil Market Report that China's oil consumption will average nearly 15.7 million bpd this year, an improvement from 14.85 million bpd seen over 2022 and second only to the United States with a 20.48 million bpd of demand growth. That being said, consistently poor macroeconomic data out of China is becoming an increasingly bearish headwind for the oil market that has been so far focused on supply-side constraints from the OPEC+ coalition.

Near 7:30 a.m. ET, the U.S. dollar index retreated 0.15% from a two-month 103.058 against the basket of foreign currencies but failed to lend price support for the front-month West Texas Intermediate contract that declined $0.84 bbl in overnight trading. International crude benchmark Brent for October delivery slid $0.62 bbl to trade near $85.59 bbl.

NYMEX RBOB September futures slipped $0.0006 to $2.9061 gallon, and front-month ULSD futures dropped back $0.0055 to $3.0826 gallon.

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

Liubov Georges