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Oil prices rebound amid positive economic signals from China and US

Oil prices rebound amid positive economic signals

Oil prices held steady on Friday, with the global benchmark Brent on track for its first weekly gain in three weeks. This comes after a period of market instability where prices had seen a downward trend. Positive economic indicators from major consumers, China and the United States, have sparked hopes for increased demand. These indicators suggest a stronger economic outlook, which in turn drives a market recovery as traders anticipate higher consumption of oil. The interplay of these economic factors provides a favorable environment for oil prices to rebound.

On Friday, Brent crude prices rose by 0.52% to $83.70 per barrel, while West Texas Intermediate (WTI) crude increased by 0.56%, reaching $80.10. This price movement signifies a steady recovery, bolstered by positive market sentiment. Over the week, Brent is poised to gain around 1%, and WTI more than 1.5%, marking a significant shift after several weeks of declines. These gains reflect growing confidence in the market as investors respond to signals of rising demand and improving economic conditions.

China's industrial production grew by 6.7% year-on-year in April, a significant acceleration compared to March's 4.5% increase. This growth is a clear indicator of economic recovery and potential increase in future oil demand. The industrial sector is a major consumer of energy, and robust growth here suggests that demand for oil will follow. Additionally, China's announcement of significant measures to stabilize the real estate sector further boosted market sentiment. Real estate is another key driver of economic activity and energy consumption, and efforts to support this sector are seen as positive for overall economic health.

Tamas Varga, an analyst at oil brokerage PVM, noted that positive economic data from China and a recent attack on oil infrastructure in Russia support higher prices. The attack, which disrupted production, added a layer of supply-side uncertainty that tends to drive prices up. However, he warned that oil has not yet fully recovered from its recent downturn. "The lack of clear enthusiasm likely stems from low demand for products, which reduces refinery margins," Varga explained. This cautious outlook highlights the complexity of the market, where positive signals are tempered by ongoing challenges.

Authorities managed to control a fire at the Tuapse oil refinery in Russia after a Ukrainian drone attack, according to officials from the Krasnodar region. This incident added supply-side uncertainty, impacting oil prices. Such geopolitical tensions and disruptions in supply chains often lead to volatility in the oil markets. The ability to manage and contain the incident quickly was crucial in preventing a more severe impact on global supply, but the event still injected a degree of unpredictability into the market dynamics.

Declines in crude and refined product inventories in global trading hubs have sparked optimism about demand. These declines reverse the previous trend of rising inventories, which had pressured oil prices. When inventories fall, it typically signals that demand is outstripping supply, leading to higher prices. This shift in inventory levels is seen as a positive development, indicating stronger consumption patterns and a tightening of the market balance.

Kelvin Wong, senior market analyst at OANDA, highlighted "several encouraging factors," including two consecutive weeks of declining U.S. crude inventories and expectations of further economic stimulus measures from China. These factors combine to create a more favorable outlook for the oil market. Declining inventories suggest that consumption is picking up, which is a direct driver of price increases. Additionally, anticipated economic stimulus measures from China are expected to boost demand further, supporting the recent price gains.

Recent economic data from the United States also contributed to a positive outlook for global oil demand. U.S. consumer prices rose less than expected in April, as reported on Wednesday, raising expectations for interest rate cuts. Lower interest rates can stimulate economic activity by making borrowing cheaper, which in turn can increase consumption, including that of oil. This macroeconomic factor plays a significant role in shaping market expectations and investor sentiment.

On the supply side, investors eagerly await decisions from the upcoming OPEC+ meeting on June 1. OPEC+ decisions on production levels can have a significant impact on global oil prices. Investors are closely monitoring the potential for any changes in output that could affect supply and demand dynamics. The anticipation of these decisions adds another layer of complexity to the market, as participants try to gauge the direction of future policy and its implications for prices.

While April saw significant price declines in the oil market following earlier gains, May appears to be a month of seeking stability. For over two weeks, U.S. WTI crude prices have hovered around $78-79 per barrel, while Brent prices have fluctuated around $83 per barrel. This period of relative stability suggests that the market is finding a new equilibrium after the recent volatility. Prices settling in a narrower range can indicate that traders are waiting for clearer signals before making significant moves.

There is also considerable hope tied to the fundamental situation in the world's largest and most important economies. In the United States, inflation has slightly decreased as expected, opening the door to speculation about a possible interest rate cut later this fall. Lower inflation and the potential for reduced interest rates would be positive signals for oil prices, as they suggest a more favorable economic environment for growth. Easing monetary policy can spur economic activity, leading to higher energy consumption and supporting stronger oil prices in the future.

oil market analysis, forex trading
XTI/USD daily chart, MetaTrader, 18.05.2024



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