China's Slow Recovery and the Energy Market Impact

Oil Prices continued to fall sharply today thanks to a mix of reports that suggest that lower demand and higher supply could stifle growth in the energy market until early 2024. Let's break it down.

What Happened

First up, China printed import and export data yesterday. While imports surprised the market by pushing upward, exports continued to lag. To keep it short: the market looked at this mixed bag of data and decided that demand in China was weaker than it should be, or at least not strengthening fast enough. Higher demand from the Chinese market was priced-in for those higher energy costs, so that's the first hit that knocked oil down a peg.

Then, the U.S. Energy Information Administration published a report suggesting that worldwide supply was actually increasing despite the massive supply cuts coming out of OPEC+. U.S. oil production and refinery utilization is up and could stay high if winter weather patterns don't cause disruptions. Meanwhile, global oil output is still rising. So, demand is down and supply is up. That's a textbook scenario for falling prices.

Fear Subsides

Furthermore, as the war in Israel develops, analysts are becoming less and less afraid this will become a wider conflict. With no disruption of oil supplies on the horizon, prices will fall too. Of course, all of these factors can turn on a dime and shoot WTI Crude prices right back up. The EIA also projects that Saudi and Russian supply cuts will gain a lot more purchase and push prices back over $80/ barrel by early 2024. But $100 oil is becoming increasingly hard to justify.

Why It Matters

Energy prices have been the last holdout for supply-side inflation. Oil prices falling this much. October already saw a pretty significant drawdown in oil prices, which should reflect positively in next week's CPI report. As fundamental prices like oil and gas continue to stay low, other costs have the opportunity to keep coming down as well. Crashing oil prices are adding to the narrative that the last Federal Reserve rate hike is behind us. WTI crude fell all the way to $76/ barrel this morning, a near 20% drop from the recent peak back in September.