Chinese Economic Woes Drag Down Crude Oil and Copper

Key points

• Brent slumps to near key support as demand worries more than offset a Libyan supply disruption
• Copper futures trade sharply lower, retracing a major portion of their August bounce
• Both commodities under pressure as China's economic slowdown shows little sign of improvement
• Large speculators have for a while maintained a cautious stance towards both

UPDATE: Since posting this update, Brent and WTI crude oil futures have slumped further, thereby challenging key support. Driven by news that Sadiq Al-Kabir, the govenor of the Libyan central bank, who has been at the center of a recent power struggle between the nation's rival governments has been out saying that there are "strong" indications the political factions are nearing an agreement to overcome the current deadlock, potentially allowing a resumption of crude oil production. 

The crude oil market sentiment remains under pressure as China's economic slowdown shows little sign of improvement, following data showing a further contraction in factory activity and a deepening property crisis, compounded by the rapid adoption of EVs and hybrid cars, which is reducing fuel demand. This has led to lower refinery runs and diminished overall oil demand. Refinery margins, a key driver for crude demand, remain weak in both Europe and the USA, with New York ULSD (Diesel) and London ICE gas oil both trading at their lowest levels in over a year.

Meanwhile, an ongoing disruption in Libya, where production has slumped by up to one million barrels per day over the past week, is surprisingly not having a positive impact on prices. This further underscores the current weak sentiment, which increasingly threatens Brent and WTI’s ability to hold above key support levels that have been in place for more than a year.

Continued price weakness, driven by a softening demand outlook, has left OPEC increasingly isolated with their optimistic forecast of over 2 million barrels per day in demand growth for this year. This projection is more than double the IEA’s forecast of less than one million barrels per day. While the Libyan disruption might have opened the door for OPEC+ to proceed with their planned production increase—starting with 180,000 barrels a day from next month—the risk of prices falling further below the group’s desired and increasingly elusive target of USD 90 per barrel Brent may now compel them to reconsider or postpone this decision.

The Brent crude oil futures contract is currently trading near USD 76, and just above key support in the USD 75 area, a break below which may attract fresh momentum selling and a move towards the next major area of support around USD 71.