By Ambar Warrick
Oil prices were muted in early trade on Wednesday as investors weighed slowing economic growth in China against potentially tightening supply, while signs of a bigger-than-expected build in U.S. inventories kept sentiment subdued.
Crude markets slumped 3% on Tuesday, sharply reversing recent gains as signs of slowing economic activity in China brewed more concerns over the country’s crude demand. Data on Wednesday showed Chinese factory inflation slowed for the first time in a year in October, indicating that manufacturing activity is likely to remain subdued in the near-term.
China’s consumer inflation also grew less than expected last month, as COVID-19 restrictions continued to stifle economic activity. These measures are the biggest reason behind China’s weakening crude demand this year.
While the country did import more than expected oil in October, a bulk of it was due to increased import quotas and lower prices. Crude consumption remained largely subdued in China, with a recent hike in export quotas indicating more woes.
Crude markets were privy to some profit taking after a strong rally over the past two weeks.
Also weighing on the mood, data from the American Petroleum Institute showed that U.S. crude inventories grew a more than expected 5.6 million barrels in the week to November 4. Government data due later in the day is expected to show a 1.36M build.
Oil prices rallied sharply in recent weeks on positive cues from a softening dollar and expectations of a smaller interest rate hike by the Federal Reserve. Markets also cheered reassurances from the Organization of Petroleum Exporting Countries that it will cut supply as needed to stabilize prices.
But fears that a pronounced global economic slowdown will dent crude demand persisted, especially amid rising interest rates and elevated inflation. U.S. inflation data due on Thursday is expected to shine more light on this trend, given that it will likely factor into the Fed’s interest rate decision in December.
Markets were also disappointed this week by comments from Chinese authorities that they have no plans to scale back the country's economically-damaging zero-COVID policy.