
US interest rates and Chinese oil consumption: fundamentals in the oil market
US interest rates and Chinese oil consumption: fundamentals in the oil market
- In recent years, the price of oil has been boosted by the reduction in supply by OPEC+, sanctions on Russia and geopolitical uncertainties in the Middle East, such as the conflict between Israel and Hamas.
- These events have lessened the impact of US monetary policy on the energy market, since high interest rates support the dollar, making commodities more expensive for those who hold other currencies.
- The price of oil fell by more than 5% in July, reaching its lowest level since June, due to a lack of growth in Chinese imports and a 6.7% drop in June compared to last year.
- In the coming months, the oil market is likely to oscillate between upward pressure, due to possible adjustments in US monetary policy, and downward pressure, caused by Chinese demand.
Introduction
In recent months, the price of oil has fluctuated between US$ 70 and US$ 90 per barrel. On the one hand, geopolitical tensions have pushed prices close to US$ 90. On the other hand, data on the American macroeconomy has pushed prices down to levels close to US$ 70. Now we're seeing the opposite. US GDP grew by 2.8% in the second quarter, while inflation, according to PCE data, didn't show any increase. Both indicators reinforce the case for an interest rate cut in September.
However, the main oil benchmarks ended the week down for the third week in a row. Brent closed at US$ 81.13, down 1.82% on the previous week. WTI ended the session at US$ 77.16, down 3.71%. The reduction in Chinese imports, coupled with the easing of geopolitical tensions in the Middle East as a result of ceasefire negotiations, partially reduced some of the market's bullish fundamentals.
In this context, let's discuss what market fundamentals have impacted the price of oil in recent weeks.
Image 1: Main crude oil benchmarks (US$/bbl)

Source: Refinitiv
Image 2: USA - Commercial Oil Stocks (million barrels)

Source: EIA
Interest rate cut brings bullish fundamentals for oil
In recent years, a number of factors have benefited the price of oil and oil products. OPEC+ actions have removed approximately 5.86 million barrels a day from the market. The invasion of Ukraine brought sanctions against Russia and caused interruptions in the supply of oil and natural gas from the country to Europe. Last year, the Hamas attack on Israel created uncertainty in the Middle East and increased geopolitical premiums on the market.
If, on the one hand, these events have reduced the bearish impact of US monetary policy on the energy market, on the other, it is important to note that high interest rates support the value of the dollar, which in turn affects the consumption of commodities. As these commodities are traded in dollars, they become more expensive for holders of other currencies.
After the first half of the year frustrated the most optimistic expectations of a reduction in US interest rates, the latest balance of data is fueling hopes of a 25 basis point cut by the Fed in September. Perhaps as a reflection of this movement, speculators are increasing their long positions in the market, as shown by CFTC and ICE data.
Image 3: Evolution of Non-Commercial Positions (1,000 barrel contracts)

Source: CFTC, ICE, Hedgepoint
Note: non-commercial positions involve money managers and other reportables
China uncertain about consumption expansion for 2024
The price of oil fell by more than 5% in July, reaching its lowest level this week since the beginning of June. The main reason for this is that Chinese oil imports did not grow in 2024, as initially expected, and in June they fell by 6.7% compared to the same period last year.
Other data brings uncertainty to oil consumption in the world's second largest economy. Refinery production was 3.7% lower year-on-year in June, the manufacturing PMI is below 50, indicating contraction, and the growing relative share of electric cars in the Chinese economy has reduced gasoline consumption in the country. The balance of these indicators could result in downward revisions to the expansion of oil consumption in 2024.
In addition, a possible Trump administration could bring significant changes to the oil market. In the short term, his protectionist policies should result in stronger economic activity in the country, but could affect the monetary policy easing cycle. In the long term, policies that encourage domestic oil production in the US could alter the balance of forces in the global market, with the potential to put downward pressure on prices.
Image 4: China - Crude Oil Imports (million barrels)

Source: Bloomberg
Summary
Weekly Report — Energy
victor.arduin@hedgepointglobal.com
ignacio.espinola@hedgepointglobal.com