Oil Down On China Woes, But Croft Worries That Iran Could Be Bigger Issue

Meanwhile, OPEC's promised output cuts are slow in coming: File Image/Pixabay

Proving again that crude trading behaviour is more inconsistent than ever, oil on Monday fell more than 1 percent as investors expressed concern over China's property crisis, despite Friday's gains that were spurred by positive economic data coming from that country.

Brent settled down $1.15, or 1.4 percent, at $82.40 per barrel, while West Texas Intermediate settled down $1.23, or 1.6 percent, at $76.78 per barrel.

News of a Hong Kong court ordering the liquidation of the China Evergrande Group (considered to be the world's most indebted developer with over $300 billion in total liabilities) sent trading into a tailspin, even though the two benchmarks earlier gained over 1.5 percent due to a fuel tanker being hit by a missile in the Red Sea and U.S. troops attacked and killed in Jordan.

John Kilduff, founding partner at Again Capital, said, "The situation in China is the biggest headwind to the whole market, that is why the market keeps backing off from the war risk premium."

For the record, Evergrande negatively impacted China's economy when it defaulted on its debt in 2021, and its liquidation has caused analysts to question the country's fragile capital market.

Not overlooked by traders on Monday  were reports of crude shipments from the Organization of the Petroleum Exporting Countries (OPEC) being largely unchanged in January, and Kpler Ltd. noted that this suggested the cartel's promised output cuts were slower to materialize than anticipated. 

Even though Monday's trading was generally viewed as a correction for oil being in overbought territory for the previous few sessions, Rebecca Babin, a senior energy trader at CIBC Private Wealth, pointed out that long positions only increased marginally and that "You need people to believe the rally and not just be afraid of losing money."

Meanwhile, Helima Croft, global head of commodity strategy at RBC Capital Markets, worried that the escalation of hospitalities in the Middle East amid the U.S. preparing a response to Monday's attack on its troops could soon have major impact on oil.

She said, "There's a corner of this market that believes that this is not going to escalate to Iran; but again, we are getting closer and closer to a wider war."