Investing.com-- Oil prices retreated Monday as markets awaited new developments in the Middle East conflict, while anticipation of several key U.S. and Chinese economic readings this week kept sentiment on edge.
By 05:15 ET (10:15 GMT), Brent oil futures fell 0.8% to $77.66 a barrel, while West Texas Intermediate crude futures dropped 0.9% to $72.16 a barrel.
A U.S. market holiday is expected to keep trading volumes thin.
Crude prices consolidated in early trade Monday, after last week saw strong gains on the back of U.S. and British strikes against the Iran-backed Houthi group in Yemen. This ramped up concerns over a broader conflict in the Middle East, which, coupled with the Israel-Hamas war, threatened to disrupt oil supply from the region.
Markets were now awaiting any potential retaliation by the Houthis for last week’s strikes, after the group said it will continue targeting ships headed towards Israel.
"While geopolitical risks are certainly building, we are still not seeing a reduction in oil supply as a result of developments in the region," said analysts at ING, in a note. "But, the more escalation we see in the region, the more the market will have to start pricing in a larger risk of supply disruptions."
Oil prices were also nursing a weak start to 2024 after tumbling over 10% in the past year, as markets remained convinced that global crude demand will see little improvement this year amid pressure from high interest rates, cooling economic growth and sticky inflation.
China, US data awaited for more demand cues
Focus was now squarely on key upcoming economic readings from the U.S. and China this week, for more cues on the potential path of demand.
China’s central bank decided against cutting medium-term lending rates earlier Monday, raising concerns of the extent it has to shore up a slowing economic recovery.
Chinese fourth-quarter gross domestic product data is due on Wednesday, and is expected to potentially set the tone for the Chinese economy in 2024. GDP is expected to have slightly edged past the government’s 5% annual target, but the rise also comes from a lower basis of comparison from the prior year.
Fuel demand in the country appeared to have improved, as trade data on Friday showed China’s oil imports reached record highs in 2023. But the outlook for Chinese demand remained uncertain in the face of high inventories and persistent weakness in the country's biggest economic engines.
In the U.S., markets will be watching for addresses from a string of Federal Reserve officials for more cues on when the central bank plans to begin cutting interest rates this year. Retail sales data is also expected to offer more cues on inflation, after data last week showed consumer price index (CPI) inflation grew more than expected in December.
Sticky inflation is expected to potentially delay the Fed’s plans to begin cutting interest rates. The dollar found some strength on this notion, which also weighed on oil prices.
Net longs in Brent at largest since October
Despite Monday's weakness, speculators boosted their positions in ICE Brent over the last reporting week, increasing their net long positions by 38,905 lots, leaving them with a net long of 208,748 lots as of last Tuesday - the largest position they have held since October.
"The move was predominantly driven by fresh longs with the gross long increasing by 29,942 lots over the period," ING added.
Net longs in Nymex WTI also rose, with the net long position increasing by 21,799 lots to 111,129 lots, with this move largely driven by short covering.
(Ambar Warrick contributed to this article.)