Oil Slips as Chinese Demand Woes Outweigh Supply Risks


   
   VIENNA (DTN) -- Oil futures closest to expiration on the New York Mercantile 
Exchange and Brent crude on the Intercontinental Exchange softened Monday 
morning after two back-to-back weeks of losses. Stunted economic growth in 
China last quarter and the lack of major policy responses overshadowed flaring 
tensions in the Middle East, wildfires in Alberta and firmed up chances of a 
U.S. rate cut in September. Even two interest rate cuts by China's central bank 
weren't enough to relieve concerns in the light of struggling domestic 
consumption and swelling debt-to-capital ratios.

   The People's Bank of China on Monday cut both 1-year and 5-year loan prime 
rates by 10 basis points. While the first interest rate cut in 11 months came 
unexpected, it was also deemed too little to revive growth rates to levels seen 
at the beginning of the year. Chinese interest rate cuts have a muted effect on 
consumer spending compared to their international counter parts, and a separate 
stimulus program does not seem to be on the table for now. A slowdown in 
domestic growth and poor refining margins led to crude oil throughput trailing 
expectations. On the bright side, we can expect a seasonal pick up in refining 
activity as operable capacity is set to increase with state refiners returning 
from maintenance and two new plants ramping up operations. And given the 
increased odds of U.S. rate cuts starting in September, the PBOC may follow 
suit.  

   A measurable cooldown in U.S. inflation and diffident growth outlooks have 
over the past month reopened the door to lowering interest rates, with now more 
than 91% of investors expecting the first 25 basis point cut at the Federal 
Reserve's September 18 meeting, compared to less than 60% four weeks ago, 
according to CME's FedWatch Tool. The Bureau of Economic Analysis' first 
projection for second quarter GDP growth out Thursday and the June PCE price 
index scheduled for Friday release will help gauge future interest rate policy.

   Near 9:45 AM ET, WTI futures for August delivery were trading near $79.39 
bbl, down $0.74, and Brent for September delivery hovered around $81.84 bbl, 
down $0.79. RBOB and ULSD for August delivery dropped to $2.4276 gal and 
$2.4052 gal, respectively.

    

    

   Karim Bastati, karim.bastati@dtn.com, www.dtn.com




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