USOIL Cautious After Another PMI Disappointment from China

China's Recovery

The Chinese economy has reopened after the country abandoned the stringent Covid-19 containment measures, but the recovery is sputtering over recent months, as indicated by a series of disappointing data. Today's latest release showed that factory activity contracted for fourth straight month in July, as Manufacturing PMI came in at 49.3, despite the uptick form June (49.0).

At the same time, consumers keep their purse strings tight, as CPI inflation was non-existent last month (0.0% y/y), although the central bank believes there is no risk of deflation ^[1]. More to it, the economy expanded by a feeble 0.8% q/q in the second quarter of the year. These data points have created concerns around the recovery of the world's largest importer of oil, but the International Monetary Fund (IMF) maintained its 5.2% 2023 GDP forecast in its latest report. ^[2]

Stimulus Optimism

Chinese authorities are not standing still and have been trying to support the expansion. The central bank (PBoC) slashed a series of rates last month to provide liquidity and facilitate the rebound. Last week, the Politburo vowed to support the economy, with a series of measure aiming to expand domestic demand, spur private investment and optimize property policies. ^[3]

Today, the country's economic planner pledged among other things, to promote consumption, increase investment and deepen reform and opening up. ^[4]

Oil Supply & Demand

Fears over China's economic performance create concerns over oil consumption and earlier in the month, the International Energy Agency (IEA) downgraded its 2023 global oil demand outlook for the first time this year. Even though IEA acknowledged that China's economic recovery is "losing steam", it still expects strong demand growth this year and the country to account for "70% of global gains". ^[5]

Furthermore, the oil market is seen tightening in the second half, as Saudi Arabia, Russia and other OPEC+ producers are implementing a massive output reduction program.

Fed Nearing the End

The US central bank has been slowing its uber-aggressive tightening cycle this year, and in fact paused it in June. Last week policymakers hiked by 25 bps to 5.5%, but they may have already done enough to control inflation. Markets certainly believe so, as CME's FedWatch Tool assigns the highest probability to rates having already reached their peak. ^[6]

At the same time, the world's biggest economy keeps on beating expectations, since it grew by 2% in the first quarter, whereas the preliminary reading for Q2 pointed to a bigger expansion of 2.4%.

USOIL Analysis

Optimism for stimulus from Chinese authorities, expectations that the US Fed is done hiking and prospects of a tighter oil market, have led USOil to five straight profitable weeks, heading towards its best month in over a year. Bulls try to take out 83.55, but we are cautious around further strength tha would tackle 90.36.

On the other hand, today's Manufacturing PMI keeps fears over the recovery alive and USOil is cautious as a result. Furthermore, the Relative Strength Index (RSI) has not followed prices over the last few days. As such, a pullback towards the EMA200 (74.80) would not be unreasonable, but the downside seems well protected form there on.