Oil prices were down on concerns that Iran could accept the EU proposal to get back into the Joint Comprehensive Plan of Action (a nuclear deal reached by Iran and China, France, Germany, Russia, the United Kingdom, and the United States) but plunged after Chinese data disappointed to the downside, causing the Chinese government to cut interest rates in two key metrics.
That news caused oil prices to plunge in the middle of the night or early morning, depending on your point of view. While Iran continues to dance the dance over the JOCPA agreement, the reality is it is very unlikely that Iran will get back into a deal with Europe. They seem to be playing this up for all that it is worth. Iran cut through selling price for oil to Asia this morning. In other words, they’re able to sell their oil regardless of whether they’re in this deal or not.
At the same time, Iran is continuing to raise their uranium enrichment levels. They’re looking for more nuclear exemptions to get back into the JOCPA deal. And while they say that the basics exist for the signing of a nuclear deal shortly, their actions show they have no intention of rejoining this deal.
Yet regardless, concerns about a China slowdown that we should have seen coming because of their continued lockdowns due to COVID-19 caught the market off guard. The Wall Street Journal reported that China’s economy stumbled in July as a two-month boost from easing lockdowns faded, prompting the country’s central bank to unexpectedly cut two key interest rates to shore up faltering growth.
A raft of data released Monday showed economic activity slowed across the board in July, including factory output, investment, consumer spending, youth hiring, and real estate, highlighting the breadth of the economic challenge facing policymakers in a politically sensitive year for leader Xi Jinping, who is expected to break with recent precedent and seek a third term in power this fall.
The fresh evidence of China’s slowdown adds to the headwinds facing the global economy this year, which is already reeling from the fallout from Russia’s invasion of Ukraine. Adding to that, efforts by central banks in the U.S., Europe, and beyond to tame rocketing inflation by jacking up borrowing costs.
Despite the Chinese news, we think interest rate reductions will encourage more demand for oil from China shortly. As far as the data that we’re seeing goes, Chinese oil demand is on the rise and should continue to be on the rise in the coming months. Yes, the disappointment in factory orders is raising concerns about a slowdown in the global economy, and that has to be watched but based on the tight supply situation we’re now in and the amount of demand destruction that we’ve seen, we still believe that this means that oil is closer to a bottom not closer to a top.
Retail gasoline prices continue to fall down a dime in a week, and while this dip in oil prices may push us down, the odds are gasoline prices are going to be bottoming out very soon. We’re looking at the refining margins and at an uptick in demand, and we’re looking at the fact that we’re going to see the market start to worry about a world after strategic petroleum reserve releases stop.
Natural gas dipped in the risk-off situation but is still in a solid position to move higher. EBW Analytics reported that natural gas initially fell last week to test resistance at $7.53/MMBtu before a combination of Freeport LNG news and a Gulf of Mexico production outage sent prices skyrocketing to test $8.994 intraday Thursday.
Ultimately, returning the GOM supply allowed the upside to fade. The higher burst illustrates the natural gas market’s sensitivity to bullish news. Technicals suggest a renewed surge above $9.00 may be in the cards, but a steep 3.4 Bcf/d week-over-week decline in power sector natural gas demand could weigh on prices near term.