Oil Slips as China GDP Disappoints

While still trading in a wide range over the past four months, crude oil underwent a substantial surge, reaching $77 per barrel last week, surpassing our expectations of a rise to $74. This rally was bolstered by the reduction of production by Saudi Arabia and OPEC+ allies, which is expected to swiftly deplete global storage tanks. As the oil market tightens, in tandem with seasonal demand growth, there is an elevated risk that prices will continue to rise throughout the third quarter.

At this juncture in time, it remains premature to declare that crude oil has reached a turning point that would instigate a robust price rally, despite Saudi Arabia’s persistent attempts to boost prices through production cuts, given lacklustre economic growth. Nevertheless, it is evident that the market has bottomed in March 2023 despite concerns surrounding economic uncertainty.

Still there remains a possibility that the next six months will witness a stronger market, as production cuts implemented by Saudi Arabia and other OPEC+ members are beginning to yield results.

Standard Chartered reports that the supply-demand balance has already shifted from surplus to deficit in June. In the upcoming months, this deficit is expected to more than double, resulting in a substantial depletion of oil inventories at a rate of 2.8 million barrels per day by August, according to estimates by the bank.

Source: TradingView

On Monday underwhelming Chinese GDP data triggered a reversal in the oil market rally. The world’s second-largest economy and primary crude oil importer reported a 6.3% GDP growth for the second quarter, falling short of the anticipated 7.3% growth. In the second quarter, GDP only expanded by 0.8% compared to 2.2% growth in the first quarter. Furthermore, the partial resumption of halted Libyan oil output has also added to the downward pressure.

Nonetheless, this current pullback is expected to be limited and short-lived, as the overall price action remains confined within the trading range of $63 to $83. While a short-term decline to the $69 to $70 range is feasible, a subsequent retest of the pivotal resistance of $83 is likely. However, oil bulls should be mindful that unless key resistance of $83 is decisively surpassed, crude oil prices are likely to continue to fluctuate within the boundaries of their current trading range.

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