Crude futures pare early gains on softer China demand outlook

Crude oil futures pared earlier gains in mid-afternoon Asian trade Aug. 3 as broad-based economic indicators in China reflected an overall slowdown in growth despite a surprise expansion in service activity.

At 2:37 pm Singapore time (0637 GMT), the ICE October Brent futures contract was up 2 cents/b (0.02%) from the previous close at $83.22/b, while the NYMEX September light sweet crude contract edged up 2 cents/b (0.03%) to $79.51/b.

China's services activity expanded in July with the Caixin services purchasing managers index rising to 54.1 at the start of the third quarter, S&P Global data showed Aug. 3.

A reading above 50 indicates an expansion while a reading below 50 reflects a contraction.

While service supply and demand continued to expand in July amid improving market conditions, Caixin Insight Group's Senior Economist, Wang Zhe, noted several headwinds remained.

"Growth in external demand has slowed significantly, with the gauge for new export business only slightly higher than 50. Surveyed companies said that the economic outlook overseas was unclear, which had limited service exports," Wang said Aug. 3.

China's services sector remains a key driver of crude consumption through components such as tourism amid sluggish manufacturing growth through the year, analysts have noted.

Taken together with the latest figures from Caixin's manufacturing PMI, the Caixin China General Composite PMI for July slowed to 51.9 in July, down from 52.5 in June, marking the slowest rate of growth in six months, Caixin said.

Reflecting the weakening demand for crude, China's independent refineries imported 16% less crude in July on the month at 14.68 million mt (3.47 million b/d), with both mega integrated refining complex and small Shandong-based independent refineries cutting their shipments in the month.

Owing to factors such as economic uncertainties and relatively high storage level throughout the petroleum value chain, any growth momentum in China's overall crude oil demand and imports would be kept in check during the second half 2023, analysts at S&P Global said.

"The uneven recovery of the services and manufacturing industries has been a prominent issue," said Wang, highlighting the weakening momentum in China's economic recovery through the second quarter.

While ANZ Research is maintaining their end of year price target of $100/b for Brent crude, they cited key demand headwinds in their latest Commodity Call report Aug. 3.

"High frequency data has remained positive in China in Q2; however, momentum has been hindered by weak industrial activity and ongoing issues in the property sector," its analysts said.

"Market conditions are more akin to a managed tightness, as opposed to the fundamental factors that pushed prices above $100/b last year," they continued, noting previously strong demand in developed markets amid their exits from pandemic related restrictions.

"OPEC's supply agreements have done their job and stabilized the market. However, the eventual unwinding of these over the next 6-12 months will ease the current supply tightness," ANZ Research said.

Nevertheless, a record drawdown in US crude inventories has helped keep a floor on prices through the Asian session.

US crude oil inventories fell by a record 17 million barrels in the week to July 28, leaving inventories at 439.7 million barrels, US Energy Information Administration showed late Aug. 2.

US gasoline inventories climbed 1.5 million barrels to 219.1 million barrels the week ended July 28, while distillate inventories fell 796,000 barrels to 117.2 million barrels, EIA data showed.