Crude oil prices decline 5% this week, hit 2-week low in 4th consecutive day of falls

Brent crude futures fell 37 cents to $83.08 a barrel on August 17

Crude oil has faced a downward trajectory for the fourth consecutive day this week, reaching its lowest point in two weeks. The ongoing decline has resulted in a significant 5 percent drop in prices over the course of the week, signalling a turbulent period for the commodity.

Brent crude futures fell 37 cents, or 0.44 percent, to $83.08 a barrel, while US West Texas Intermediate crude (WTI) was down 39 cents, or 0.49 percent, to $78.99 a barrel, Reuters reported.

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Contributing factors

Several factors have combined to put downward pressure on crude oil prices this week:

Strong dollar impact: The dollar index surged to a six-week high, exerting negative influence on crude oil prices. The strengthening dollar has made crude oil more expensive for international buyers, dampening demand.

Fed's rate hike speculations: The release of the United States Federal Reserve’s (US Fed) policy minutes indicating potential future rate hikes has cast a shadow over the crude oil market. Investors are concerned that higher interest rates could lead to reduced economic growth and subsequently lower demand for oil.

Further, minutes of the meeting published on August 16 showed that a few Fed officials would have backed pausing US interest rate hikes last month, but ultimately supported another increase to tackle high inflation, AFP reported.

The July gathering saw all 11 voting members of the policy-setting Federal Open Market Committee (FOMC) support lifting rates by 25 basis points, as inflation remains stubbornly above the central bank's long-term two percent target. The FOMC decision to raise rates lifted the Fed's benchmark lending rate to a range between 5.25-5.5 percent, its highest level since 2001.

Also Read | When Fed cuts rates, it may still be tightening via QT program

China's economic concerns: China has also played a significant role in the fall of crude oil prices. Adding to the stress, Chinese local corporate bond defaults are running at the highest levels since the beginning of the year. The MSCI China Index fell 0.8 percent on August 17 morning in its fifth day of losses, Bloomberg reported. The offshore yuan is approaching a record low against the greenback.

China’s domestic crisis: A prominent Chinese trust firm's missed payments on investment products have raised alarms about the stability of country's financial system. Moreover, falling home prices, trade data, investments, and manufacturing activity in China have collectively contributed to the negative sentiment.

Zhongzhi Enterprise Group Co., one of the country’s largest private wealth managers, is the latest financial giant to face the prospect of failure as the fallout from a deepening property slump spreads. Country Garden Holdings Co., which was previously the nation’s biggest property developer, is on the brink of default after sales plunged and it failed to meet an initial deadline to pay coupons on dollar bonds. Zhongzhi Enterprise hired KPMG in late July to review its balance sheet amid a worsening liquidity crunch, Bloomberg reported.

Also Read | China’s troubled $137 billion shadow bank plans debt restructuring, taps KPMG

China's policy shift: China's decision to cut key policy rates for the second time in three months has raised concerns about the country's economic health and future oil demand.

Inventory and production data

According to the US Energy Information Administration (EIA), the country’s crude inventory saw a notable decrease of 5.96 million barrels, totalling 439.7 million barrels. However, despite the decline in inventory, US crude production hit a three-year high at 12.7 million barrels per day (mbpd).

US Crude Production Trends

View on metals

The metals trade is also under pressure after the Fed policy signalled more rate hikes are on the table amid rising inventories in warehouses.

Among metals, gold is trading at a five-month low, with prices breaking below $1,900 an ounce (oz). Further, copper is at a seven-week low, with LME inventories up 52.3 percent in a month to 90,150 tonnes.

Also, zinc prices are at a two-and-a-half month low, with LME inventories surging 54 percent in two days. In fact, zinc inventories are at a 17-month high.

Aluminium futures are also at a five-week low, as China production rose 2 percent in July, and 2.7 percent year-to-date (YTD). Steel prices are near two-month lows, with China rebar inventories surging 35 percent year-on-year (YoY).

Nickle is also approaching near one-year lows, with high supplies from China and Indonesia.