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Cautious investors weigh on oil prices

Oil prices started the week lower as investors became more cautious about China's economic recovery after lower than expected growth forecasts.

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Oil prices were down on Monday, with a 1.17% drop in North Sea Brent crude for May delivery, and a 1.19% drop in U.S. West Texas Intermediate (WTI) for April delivery. This decline is explained by investors’ growing skepticism about the strong economic recovery of China, the world’s largest crude oil importer. Indeed, the country’s economic growth forecasts are lower than expected, with a target of about 5% in 2023, one of the most modest targets in decades. Investors thus took advantage of this announcement to “take their profits”.

Lower than expected growth forecasts

The Chinese government’s progress report released on Sunday at the opening of the annual session of the National People’s Congress (NPC), China’s parliament, said that the targeted economic growth for the year 2023 would be “about 5%”. This forecast, which fell short of market and investor expectations, raised doubts about China’s ability to quickly return to its pre-pandemic level of economic growth. Investors reacted by taking profits, causing oil prices to fall.

Encouraging signs for an economic recovery in China

Despite this drop in oil prices, the latest economic data from China released last week was encouraging. Indeed, two PMI activity indices for February were published, largely exceeding investors’ expectations. These were the first concrete signs of economic recovery since the health restrictions were lifted. Last week, Brent crude rose by more than 3% and US WTI by more than 4%. Despite this, analysts believe that oil prices could remain high given strong increases in global GDP growth forecasts and a rebound in China’s reopening.

Inflation: a central concern in the West

In Europe and the United States, inflation remains a central concern, weighing on oil demand. According to Tamas Varga of PVM Energy, “the current gloomy investment environment” will only clear up with tangible signs of easing inflationary pressures in the West. It is therefore possible that investors will be cautious in the coming months, with high volatility in oil prices.

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