Oil steadies after rising 2% amid tight supply and China stimulus hopes

The US central bank is expected to raise its benchmark interest rate by a quarter point this week

Supply vessels used in the oil, gas and renewable energy industry docked at the Aberdeen Harbour, in the North East of Scotland. AFP

Oil prices were steady on Tuesday after rising more than 2 per cent the previous day on tight supply concerns and hopes of an economic stimulus in China, ahead of a crucial US Federal Reserve meeting.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.45 per cent up at $83.11 a barrel at 7.35pm UAE time while West Texas Intermediate, the gauge that tracks US crude, was up 0.58 per cent at $79.20.

On Monday, Brent settled 2.1 per cent higher at $82.74 a barrel while WTI was up 2.17 per cent at $78.74.

“There have been a number of factors that have contributed to the gains recently, starting with Saudi Arabia’s extension to its million-barrel cut alongside Russia's export reduction followed by data that could enable a soft landing in countries that are aggressively raising rates,” said Craig Erlam, senior market analyst at Oanda.

“It will be interesting to see how Brent responds around roughly $82.50-$83.50 where it is already seeing some resistance,” Mr Erlam said.

In China, the world’s second-largest economy and top crude importer, politicians pledged to accelerate support for the economy as it recovers from the Covid-19 pandemic.

China's economy is facing new difficulties and challenges, which mainly arise from insufficient domestic demand, difficulties in the operation of some enterprises, risks and hidden dangers in key areas, state news agency Xinhua cited the Politburo as saying.

It is necessary to stick to a proactive fiscal policy and a prudent monetary policy, ensure the implementation of tax and fee reductions, and give full play to the role of quantitative and structural monetary tools, the Politburo said.

China’s gross domestic product expanded by an annual 6.3 per cent from April to June, after growing by 4.5 per cent in the previous three months, as the country reopened after removing Covid-19 restrictions, according to the National Bureau of Statistics.

However, the pace of growth in the second quarter missed the 7.1 per cent estimate of economists polled by Bloomberg and the 7.3 per cent forecast of those surveyed by Reuters.

Meanwhile, markets expect the Fed to raise its benchmark interest rate by a quarter of a point at its meeting today and tomorrow.

This would raise the federal funds rate to a range between 5.25 and 5.5 per cent, the highest level since 2001.

Last month, the Fed paused raising interest rates for the first time since it started its monetary tightening cycle in March 2022 to assess the effect on the economy. It signalled it would resume raising rates again this year if needed.

“Interest rates are finally at or very close to their peaks and this week could see the Fed and [European Central Bank] announce the last rate hike in their tightening cycles,” Mr Erlam said.

Daniel Richards, Mena economist at Emirates NBD, said that preliminary purchasing managers' index surveys for several advanced economies confirmed that economic growth was slowing.

But the slowdown in growth was “not so bad that they would deter central banks from staying the course on their monetary tightening in upcoming meetings”, Mr Richards said.

S&P Global said its US Composite PMI index, which tracks manufacturing and service sectors, dropped to 52 this month from 53.2 in June, indicating a “modest” expansion in private sector business activity.

The pace of growth eased to the slowest since February amid a softer sharp rise in service sector output, the survey said.

“Manufacturing firms saw production broadly unchanged on the month, following a contraction in June, supported by producers relying on backlogs of work and a shallower drop in new orders,” it added.