Oil down again; Saudi-Russia cuts lose out to weak China, hawkish Fed

Investing.com -- The Saudi-Russian bid to get more money for a barrel of oil is foundering against Chinese buying reluctance and rallying Treasury yields and the dollar that are weighing on commodities denominated in the U.S. currency.

Crude prices initially rallied Monday as data from oil cargo tracker Kpler indicated a dramatic drop in crude exports from the Organization of the Petroleum Exporting Countries and their allies in the first 15 days of August.

The output cuts from the so-called OPEC+ alliance, led largely by the Saudis and Russians, could take away some 67.5 million barrels from the market over the next 45 days, energy markets advisory HFI Research said at the end of last week, summing up its own calculations of Kpler data.

But after both New York-based West Texas Intermediate, or WTI, and London-based Brent had rallied about $1 a barrel or more, the market was suddenly deflated of buying interest like a balloon that had lost all its air as bond yields and the dollar began surging on what the Fed would likely say at its much-watched annual policy event beginning Friday in Jackson Hole, Wyoming.

Yields for benchmark 10-Year U.S. Treasuries hit 2007 highs while the Dollar Index, that pits the U.S. currency against six major rivals, rose to 2-month peaks.

Investors will particularly be looking out for a speech this week by Fed Chair Jerome Powell on how the central bank envisages interest rates going forth.

Powell’s speech, set for 10:05 am ET on Friday, comes after last week’s minutes of the central bank’s July meeting showed that most policymakers are still concerned about upside risks to inflation, indicating that further rate hikes cannot be ruled out. For now though, traders on the money market see a 89% chance of the Fed holding rates at current levels at its September meeting, according to Investing.com's fed rate monitor tool.

WTI for the most active October contract on the New York Mercantile Exchange settled down 54 cents, or 0.7%, at $80.12 per barrel. WTI hit a session high of $81.74 earlier. The U.S. crude benchmark finished last week down 2.3% after a near 20% gain over seven previous weeks.

Brent settled down 34 cents, or 0.4%, at $84.46 per barrel. It earlier hit a session high of $85.83. The global crude benchmark lost around 3% last week after a seven-week rally that gave oil bulls an 18% return.

Some analysts said crude was expected to stay volatile through the week and possibly end lower on weaker technicals, combined with the “China-bear” story and expectations for a hawkish Fed at Jackson Hole.

China's renewed economic weakness has raised questions over whether its oil demand can remain resilient.

Evergrande (HK:3333), one of China’s biggest names in real estate, filed Thursday for Chapter 15 bankruptcy, which is a way for foreign companies to use US bankruptcy law to restructure debt. The process will take time, as Evergrande has roughly $19 billion in offshore debt.

The filing serves as a cautionary tale about the growth-at-all-costs model that underpinned China’s spectacular growth over the past 30 years. For decades, Evergrande — pronounced “ever grand,” with a silent final “e” — gobbled up debt as China’s economy exploded. Demand for housing was so strong, homebuilders often pre-sold apartment units to buyers before construction was complete.

But a sudden shift in policy by China’s leaders two years ago has left the country’s property developers scrambling for cash, compounding financial risks within the world’s second-largest economy.

Evergrande’s crisis raises questions on which would be the next shoe to drop on the Chinese economy. And that appears to be Country Garden, another major name in realty which employs some 300,000 people. The firm has already missed two payments on its multibillion-dollar debt and said it was considering “various debt management measures.

July was a particularly woeful month for China, with one bad patch of economic data after another, from bank loans at a 14-year low and exports sliding their most since February 2020. The yuan also tumbled against the dollar, adding to the weight on commodities, particularly oil.

The People’s Bank of China cut its one-year loan prime rate by 10 basis points to 3.45% earlier Monday. While this was less than had been expected, and the five-year rate which is used to determine mortgage costs was left unchanged, this still suggests that Beijing is determined to support the second largest economy in the world as it struggles with a slowing post-COVID economic recovery. The Chinese central bank unexpectedly cut short and medium-term lending rates last week.

"It seems that (China's recovery) is not going to happen," John Kilduff, partner at New York energy hedge fund Again Capital, said. "It's doubtful they're going to be buying. They bought a lot of crude for storage earlier in the year. They're sitting on a lot of crude."

(Additional reporting by Peter Nurse in London and Ambar Warrick in Singapore)

This article first appeared in Investing.com