USOIL Suppressed as China’s Inflation Data Disappoint Again

USOIL Analysis

China's economy has been reopening after authorities abandoned the strict-zero Covid policies, but a string of weak data from the world's biggest importer of oil, have caused concerns around the recovery process and around oil demand as a result.

Today's release showed only a small increase in consumer prices (CPI), to 0.2% y/y, in another sign of weak demand. Even worse, factory gate prices (PPI) slumped 4.6% y/y, in the biggest decrease since 2001. The almost non-existent consumer inflation and the deeper deflation on the producer side, weigh on oil prices.

USOil is subdued as markets digest the data and having rejected once again a familiar confluence of resistances, there is risk for sub-67.01 moves. This keeps the 2023 lows in the spotlight (63.63), but sustained weakness in that regions remains difficult.

On the other hand, poor Chinese data raise odds for more stimulus by Chinese authorities. The central bank had already cut the reserve requirement ratio (RRR) in March ^[1], allowing financial institutions to hold a smaller amount of their cash as reserves, in an effort to facilitate economic expansion. More to it, major state banks lowered their deposit rates this week, according to Reuters. ^[2]

Despite recovery concerns, China is still expected to grow at a robust pace this year. Last week, the World Bank raised its GDP forecast to 5.6% ^[3]. Furthermore, the International Energy Agency (IEA) had upgraded its demand forecast recently, anticipating China to account for nearly 60% of the projected 2.2 million barrels per day (bpd) projected increase. ^[4]

On the supply side, OPEC+ already has a massive output reduction plan in play, in excess of 3.6 million bps, which is expected to lead to tighter markets in the second half of 2023 and Saudi Arabia announced an additional cut of one million bpd for July. ^[5]

Prospects for a rate pause by the Fed next week, can also support oil prices, but the monetary outlook is very uncertain. Central banks continue to be all over the place, as the latest policy decisions showed.

As such, USOil still has the ability to push for higher highs (74.73) and daily closes above the EMA200 could shift bias on the upside. However, the commodity does not inspire much confidence at this stage for an advance towards 80.95.