Oil Down On China Property Woes, But Bearishness Has "Evaporated": Kemp

Meanwhile, scaling back asset purchases in the U.S. could trigger more oil losses: File Image/PixaBay

Oil prices on Monday dropped to their lowest level in over a week after talk spread that a possible implosion in China's property sector could impact its appetite for crude.

West Texas Intermediate dropped $1.68 to settle at $70.29 per barrel, while Brent fell $1.42 to settle at $73.92 per barrel; a stronger U.S. dollar also contributed to the sell-off.

John Kilduff, a partner at Again Capital, said, "China is the global swing demand center; if we lose China, we will lose much of the recent oil price gains."

The fear was triggered by the news that the country's highly indebted developer, Evergrande, is on the brink of default and that this would cause a domino effect in the development sector: Jenny Zeng, analyst at AllianceBernstein, explained, "In the offshore dollar market there is a considerable large portion of developers [who] are implied to be highly distressed," and she added that they "can't survive much longer" if the refinancing channel remains shut for a prolonged period.

Still, bullish sentiment for crude overall remains intact, and John Kemp, commodities analyst for Reuters, noted on Monday that hedge fund and money manager purchases of crude have totalled 116 million barrels over the last three weeks as a result of Hurricane Ida, partially reversing sales of 268 million barrels over the previous 10 weeks as a result of the resurgent coronavirus epidemic.

Kemp added, "Bearishness towards oil has evaporated almost entirely, with the total number of short positions across the six contracts at the lowest level since December 2019."

As for possible influences to crude prices in the near term, a planned U.S. Federal Reserve meeting this week could signal that the central bank is moving toward scaling back asset purchases - which would possibly cause more losses for the commodity.

But in the longer term, expectations are that diesel demand will expand in Asia during winter, while the use of oil to generate power in the U.S. may jump, both circumstances of which could encourage price gains.

Indeed, Ihsan Abdul Jabbar, oil minister for Iraq, echoed the positive sentiment of many experts by declaring on Monday that oil prices would hover in the $70s for the first quarter of next year: "The world economy is in recovery status," he said, adding that his country will probably export between 3.3 and 3.4 million barrels of crude a day this month, including from the semi-autonomous northern region of Kurdistan.