Crude Drops Over 2 Percent on Weaker Than Anticipated Chinese Demand

Despite trouble in Libya and Venezuela, the market remains stubbornly range bound. File image / Pixabay

Another assumption many analysts were relying upon to support their forecast of a recovering crude market - strong demand from China - proved questionable on Monday as weak demand data from that country caused oil to tumble by over 2 percent.

West Texas Intermediate settled down $1.23 at a three-week low of $47.59 per barrel, while Brent dropped $1.36 to $50.74 per barrel; not even news of Libya's biggest oil field reducing crude production by more than 30 percent due to security threats and worker tension could alleviate the losses.

Instead, traders were focused on National Bureau of Statistics (NBS) data showing that Chinese refineries processed 10.71 million barrels per day (bpd) in July, down 500,000 bpd from June, far deeper than anticipated.

Bill O'Grady, chief market strategist at Confluence Investment Management, noted, "The China news for oil is a concern: Beijing is trying to land an aircraft being buffeted by strong crosswinds, [and] after goosing the engine earlier this year, now they're tapping the brakes a little bit."

Phil Flynn, senior market analyst at Price Futures Group Inc., said that the reduced runs are "adding to the perception of slowing demand, and it's offsetting the concerns about Libyan oil production."

An equal amount of analytical focus is being aimed at Venezuela, which Thomas O'Donnell, a fellow at the American Institute for Contemporary German Studies described as "sitting on a volcano, and anything can start it if the government handles something wrong."

He wass referring to president Nicolas Maduro's escalating dictatorship causing rising tension among political factions and divisions in the armed forces - which, along with an economy on the brink of bankruptcy, could cripple state-run oil giant PDVSA's ability to operate.

But as troubling as these global events may be, the crude market - Monday's losses notwithstanding - remains stubbornly inert.

Yousef Gamal El-Din, anchor of Bloomberg Markets, said, "Hedge fund managers and money managers in general are getting a little bit bored with the crude oil trade....we're stuck in this middle range, and the lack of movement in either direction, justified by either fundamentals or sentiment...it's just not there."

Michael Lynch, president of Strategic Energy & Economic Research, offered further insight into what traders may be thinking: "For a long time, there was a sense of 'oh, in another year or two the market will tighten up again' and I think people are starting to think that's maybe not the case."

Last week, Helima Croft, head of commodity strategy at RBC Capital Markets, suggested that Venezuela's downfall could prove to be a significant boon to the crude market, despite the bedlam it would cause among the country's populace.