Global oil prices have dropped amid concerns over weaker growth in the Chinese economy caused by repeated Covid lockdowns and a downturn in the property sector.
A barrel of Brent crude fell by about 5% to below $94 (£78) on Monday, hitting the joint lowest levels since the Russian invasion of Ukraine as traders reacted to weaker figures from the world’s second-largest economy.
China’s central bank unexpectedly cut interest rates on its key lending facilities for the second time this year after disappointing official growth figures.
Factory output in the country’s industrial sector grew by 3.8% in July from a year earlier, below analysts’ forecasts for growth of 4.6% in a Reuters poll. Retail sales rose by 2.7% from a year ago, again significantly below expectations, as China’s economic recovery from pandemic lockdowns earlier this year showed signs of fizzling out.
China’s economy narrowly escaped a contraction in the second quarter, hobbled by the lockdown of the commercial hub of Shanghai and a deepening downturn in the property market, as well as persistently weaker levels of consumer spending.
The country’s property sector, rocked by a mortgage boycott as thousands of homebuyers refuse to keep up with payments on unfinished flats bought off plan, also weakened in July.
Julian Evans-Pritchard, a senior China economist at the consultancy Capital Economics, said: “We think the outlook will remain challenging in the coming months as exports turn from tailwind to headwind, the property downturn deepens, and virus disruptions remain a recurring drag.”
As one of the world’s biggest energy consumers, weaker growth in the Chinese economy would drag down demand for crude and other natural resources. Energy traders are also eyeing the potential for a nuclear deal between Iran and western negotiators that could pave the way for an increase in the supply of oil.
The global oil price has dropped from a peak close to $140 in March, when concerns over supplies from Russia reached their height. However, prices are still historically high as the war in Ukraine continues, at almost 50% above levels seen at the end of 2019.
Soaring energy prices have been the biggest driver of high inflation in the UK and other advanced economies amid the worsening cost of living crisis.
Bjarne Schieldrop, chief commodities analyst at the Swedish bank SEB, said it was clear that weakness in Chinese oil demand was one of the main reasons why oil prices had fallen back since early June.
“There is little hope that China will change its Covid-19 stance anytime soon and there is a high risk that Chinese demand weakness persists amid continued rolling lockdowns from month to month,” he said.