Oil is seeing its biggest drop in more than a week as export growth data out of China shows that the global economic recovery is struggling and weighing on demand for Chinese products. Oil futures dropped by more than 1 percent after China’s Trade Balance data was released, as the report showed that outbound shipments rose 1 percent in July (against market expectations of 8 percent).
The figures from June showed an increase of 11 percent, so it is easy to see that momentum is slowing greatly. Because of this data, investors have started to expect a reduced need for energy products in China. In addition to this, market data is helping to confirm these expectations, as net oil imports in China have dropped to new 2012 lows and this is helping to add to the downward pressure on oil prices.
Going forward, the main question for investors will be whether or not the latest data out of China is indicative of a wider trend or just an outlying blimp that will quickly correct itself. The September futures contract in oil dropped by more than $1 to trade at $92.30 per barrel during the New York session. Downward pressure is also seen in the Brent Crude September contract, which dropped by more than 60 cents to trade at $112.60 per barrel in London trade.
Geopolitical Factors Could Add to Downward Pressure
In China, total net imports of crude oil were seen at 21.6 million metric tons, as shown in their government data. This equates to a daily total of 5.1 million barrels, which is the lowest that has been seen since the end of 2011. This decline is not a total surprise for many investors, because these drops have coincided with decreases in industrial production growth, so this section of the economy will be closely monitored by investors going forward.
But there is some scope for reversal next week, as geopolitical events in the Middle East could limit supply productivity. Looking at the specifics, international sanctions that have been levied against Iran have decreased total oil export levels more than analysts had expected. The total shortfall was equal to 1.4 million barrels per day out of Iran and as long as this continues, it will remain a supportive factor for oil prices and help to balance out some of the demand problems that are seen in Asia.
Other factors affecting prices include the reduced production levels out of Saudi Arabia, as the country chose to reduce its output by 300,000 barrels per day in July, as production levels were well above historical averages and the country looks to bring rallies to the declining oil prices. Total production levels in July were seen at 9.8 million barrels per day as the world’s largest supplier of oil dropped production levels from the 10.1 million barrels per day that were seen in June.
The technical perspective in oil depends heavily on which time frame is being used, as the daily charts show that prices are retracing the decline from the beginning of March and look ripe for another downside extension. From the hourly perspective, however, prices are still caught in an uptrend channel, so the first indication of a major decline will be seen if this channel breaks. This would target a fall back to support in the 77.30.