Eurozone economy helps to recover oil prices

23 Mayıs 2024

Positive performance of economic activities in the Eurozone helps to recover oil prices from the lowest levels in two months

Today’s market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com

Oil prices rise slightly today by 0.4% and 0.26% for each of the West Texas Intermediate Camp (WTI) and Brent, after the successive losses that brought them to the closure at the lowest levels in more than two months.

While the growth of private sector activities in the Eurozone for the fourth month in a row helped to support oil in its attempt to reduce its losses, as the flash PMI reports indicated that economic recovery in the region is gaining more momentum and high business confidence to the highest level in 27 months.

While the growth of services activities led to this expansion in the business of the private sector in May, while manufacturing activities continued its contraction, and this has led in conclusion to limited growth in new orders due to the weak demand in international markets, according to the S&P Global / HCOB.

Despite the varying performance of activities across the region, the high confidence in the business path, which has risen to the highest level since February 2022, may constitute a positive factor on the future of economic growth, which in turn is reflected through more oil demand.

In the major economies of the region, Germany recorded an acceleration in the growth of services activities more than expected, and this prompted general growth in business activity, which comes with increased demand and high confidence around the future, despite the continued contraction of factories’ activities two years ago. While this in turn led Germany to record the first height of all new business flows in a year.

As for France, the activities of the private sector have returned to record the shrinkage in May after the growth that continued in the first quarter. However, this contraction was marginal, according to the report, and the demand in the private sector has recovered for the first time in more than a year, albeit slightly. Confidence about the future of business has also declined to the lowest level in four months, but it is still relatively high in light of firms ’intention to expand with the growth of the demand from clients, according to a report as well.

This expected growth of the Eurozone economy will not only be reflected by increasing the demand for oil from the region, but will extend to revitalize China’s consumption of crude, as the European Union is the most important trading partner. This comes in light of the weak internal demand in the largest factory in the world, so more positive performance of the economies of commercial partners means more growth and demand for oil by China. While the markets closely monitor the development of oil demand from China, as it is a key factor for crude prices.

The oil markets were also pressure yesterday with the greater accumulation of crude stocks in the United States last week. Added to this the minutes of the Federal Open Market Committee, which again highlighted the concerns of the monetary policy makers about the inability to achieve the target of inflation and the tendency more to keep the current rates higher for longer.

Despite the return of the tightening narrative of monetary policy, market expectations about the upcoming steps of the federal have not changed and the markets are still preferred by the possibility of 50% and 47% to reduce 25 basis points in September and November, respectively, according to CME FedWatch Tool.

Also, it may seem that oil has lost the premium of the geopolitical risk that it gained with the ignition of the conflict in the Middle East, and developments there are less important for energy markets despite the roller coaster scene during the past few days. As fears continue to decline on the ignition of a large-scale regional war, oil continues to lose its premium.

 

Zaid Barem / YMM