Oil Prices Supported as China Vows to Provide Stimulus

USOIL Analysis

China's recovery is sputtering, according to a string of disappointing economic data over recent months. GDP grew by a frail 0.8% q/q in the second quarter, factory activity has slipped to contraction territory over the past three months, while consumer inflation was non-existent in June (0.0% y/y).

This has created expectations that authorities will ramp up support and the central bank has already slashed a series of rates, to provide liquidity. According to Xinhua, China's Politburo on Monday acknowledged the difficulties and pledged to take action to address them. Among other things, officials are looking to expand domestic demand, spur private investment and optimize property policies. ^[1]

Markets reacted positively to the news from the world's biggest importer of oil. They pushed USOil higher yesterday, helping it enter its fifth straight profitable week. This brings the 2023 highs in its crosshairs (83.55), but we are still cautious about sustained strength past that.

On the other hand, the move looks stretched and pressure back towards the EMA200 would not be surprising (at around 73.50). Daily closes below it would pause the upside momentum, but strong catalyst would be required for such outcome.

Oil prices have also been supported by optimism for an end to the Fed's hiking cycle, following the recent soft CPI inflation report. Policymakers are widely expected to raise rates on Wednesday, but the outlook is uncertain. Markets hope this will be last increase and see rate cuts next year, but they have been disappointed before. The outcome and the signaling around the next step can dictate the trajectory of oil prices.