Oil prices drop as China economic slump threatens to spread

Oil prices fell on Tuesday over signs that an economic slowdown in China, the world’s second-largest economy and oil consumer, was spreading, stoking concerns over future fuel demand.

The gloomy economic news has pulled down financial markets across Asia, including crude oil futures.

International Brent oil futures were at 62.26 dollars per barrel at 0736 GMT, down 48 cents, or 0.8 per cent from their previous close.

US West Texas Intermediate crude futures were at 53.43 dollars per barrel, down 0.7 per cent, or 37 cents.

China’s state planner on Tuesday warned that the downward pressure on the economy will affect China’s job market as falling factory orders point to a further drop in activity in coming months and more job shedding.

On Monday, China reported its lowest annual economic growth since 1990.

China’s oil imports have so far defied the economic slowdown, hitting a record above 10 million barrels per day in late 2018, but many analysts believe the country to be at peak energy growth, with its thirst set to wane as the slowdown bites.

“Slowing manufacturing activity in China is likely weighing on demand,” said Singapore-based tanker brokerage Eastport, adding that industrial slowdowns tended to be leading indicators that fed gradually into lower demand for shipped oil products.

In a sign of spreading economic weakness, South Korea’s export-oriented economy slowed to a six-year low growth rate of 2.7 per cent in 2018, official data showed on Tuesday.

This came after the International Monetary Fund on Monday trimmed its 2019 global growth forecast to 3.5 per cent, down from 3.7 per cent in last October’s outlook.

There is a high correlation between economic growth and oil demand growth.

“This was the second downturn revision in three months, and we can still see further downgrades in near future if trade tensions escalate.

“The UK exits with a no-deal from the EU, or China’s economic growth drops more sharply,” said Hussein Sayed, chief market strategist at futures brokerage FXTM.

In spite of the darkening outlook, oil prices have been getting some support from supply cuts started in late 2018 by the Organisation of the Petroleum Exporting Countries.

“The effects of OPEC-led cuts will undoubtedly place a price floor under crude oil,” said Singapore-based brokerage Phillip Futures on Tuesday.
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