Oil slips over 1% as deflationary concerns in China dampens sentiment

Oil prices slipped over 1% on Monday as concerns over poor demand from China, and lack of clarity on the stimulus front weighed on sentiments. 

After having gained for the last couple of weeks, oil prices were in the red on Monday as the market continued to wait for Israel’s response to Iran’s attack. 

The risk premium on oil prices eroded somewhat today as China’s inflation data showed that the consumer price index cooled down further in September. 

At the time of writing, the price of West Texas Intermediate crude oil was at $74.53 per barrel, down 1.4%, while Brent was 1.3% lower at $77.98 a barrel. 

Deflation worries in China

The consumer price index rose 0.4% on  year in September, compared with 0.6% in August, data from the National Bureau of Statistic showed. 

The producer price index also fell 2.8% year-on-year in September against a 1.8%-decline in August. Analysts had expected the index to fall 2.5% last month. 

“Consumer prices index reading from China indicates a sustained deflationary trend and weaker domestic consumption despite the announcement of the most aggressive monetary stimulus by authorities in September," Priyanka Sachdeva, an analyst at Phillip Nova, was quoted by Reuters in a report. 

Poor demand in China is likely to affect the country’s oil imports as well. China is the world’s biggest importer of crude oil. 

China’s stimulus package disappoints

On Saturday, China’s finance minister pledged to significantly increase debt, but left investors guessing about the size of the stimulus package. 

As China’s economy remains fragile, oil demand from the Asian giant is expected to feel the brunt as well. 

IG market analyst Tony Sycamore told Reuters that the briefing by the Chinese finance minister was a “flop”. 

Sycamore told Reuters:

Forecast for this week

This week, oil prices are likely to take cues from China’s economic activities as well as geopolitical risks. 

Experts also believe that Hurricane Milton, which hit Florida last week, has shut down several oil facilities in the Gulf of Mexico region. This could cripple supply of oil in the region, pushing prices higher. 

Meanwhile, the market is still waiting for Israel to retaliate against Iran. However, the US has urged Israel to avoid targeting Iran’s energy infrastructures. 

If Iran’s oil facilities are to be hit, the world could likely lose 4% of total crude oil supply. 

Analysts at FXempire said that West Texas Intermediate crude oil could hit $80 per barrel if Israel attacks Iran this week. 

James Hyerczyk, author at FXempire, said in a note:

“Traders should closely monitor geopolitical developments and U.S. crude stock reports for further market direction,” Hyerczyk said. 

Traders will also focus on the monthly oil market report by the Organization of the Petroleum Exporting Countries to be released later today.