Oil Futures Experience Weekly Decline Amid Concerns over Chinese Demand and Rising Bond Yields

Price Action

• West Texas Intermediate crude for September delivery fell 0.3% to $80.11 a barrel on the New York Mercantile Exchange, resulting in a weekly decline of 3.7%.
• October Brent crude, the global benchmark, was down 0.5% at $83.75 a barrel on ICE Futures Europe, experiencing a 3.5% decrease for the week.

Market Drivers

Renewed concerns about China's property sector and ongoing weak economic data from the country, which is the world's second-largest crude oil consumer, have contributed to the pullback in oil prices.

Analysts, however, believe that China's oil consumption figures have remained steady despite the macroeconomic challenges.

"While Chinese macro data has underwhelmed over recent weeks, end-use refined product data looks far from terrible," stated Michael Tran, commodity strategist at RBC Capital Markets, in a note on Friday.

# Chinese Product Inventories Remain Tight Despite Recent Rebound

According to industry experts, Chinese product inventories are currently facing tight conditions. While diesel inventories have seen a recent rebound from a low point, gasoline stocks have continued to fall for 13 consecutive weeks. This situation is particularly noteworthy considering the surge in refinery utilization since the turnaround season ended in June.

Tran, an industry analyst, highlighted that the strong demand has led to this scenario, even with the refinery run rate clocking in at an annualized high of 14.9 million barrels a day (mbd). This represents a year-over-year increase of 1.8 mbd. Tran also mentioned that Chinese refined product exports have remained relatively subdued. While July flows have shown a modest increase on a monthly basis, gasoline exports have declined while gasoil and jet-fuel exports have experienced a moderate rise.

Implications of the U.S. Treasury Market and Dollar Strength

On the other side of the globe, the U.S. Treasury yields have broken out to the upside. The 10-year yield recently rose above 4.25% to reach a 15-year high. Alongside this upward movement, the U.S. dollar has rallied as well. The ICE U.S. Dollar Index has climbed 0.7% this week and approximately 1.7% during August so far.

While the stronger dollar can benefit certain aspects of the market, it can also have a negative impact on commodities priced in this unit. This is due to the increased expense for users of other currencies.

Considering these recent developments, it is evident that Chinese product inventories continue to face pressure, while the U.S. dollar's strength has potential implications for commodities priced in this currency.