Why Are Oil Prices Dropping? Fed’s Decision and China’s Economic Slowdown Explained

Oil prices continued downward as investors grew cautious ahead of the Federal Reserve’s upcoming interest rate decision.

West Texas Intermediate (WTI) crude oil for January delivery settled at $70.71 per barrel on the New York Mercantile Exchange on Monday, down $0.58 (0.81%) from the previous session. Brent crude oil, the global benchmark, also declined, with the February contract falling $0.58 (0.78%) to close at $73.91 per barrel.

WTI experienced a sharp decline of nearly 1.3% during intraday trading and remained in negative territory throughout the session. The market’s bearish sentiment was fueled by concerns over sluggish demand recovery, particularly in China. The National Bureau of Statistics of China reported that November retail sales grew by just 3.0% year-over-year, falling short of both October’s 4.8% increase and analysts’ expectations of 4.6% growth.

Robert Yawger, an executive Director of Energy Futures at Mizuho Americas, noted that while China has historically been a key driver of oil demand, recent economic headwinds and the surge in electric vehicle sales have significantly dampened the country’s oil consumption growth. Phil Flynn of Price Futures Group added that market participants closely monitor potential Chinese economic stimulus measures, warning that inadequate support could increase market volatility.

As the Federal Reserve prepares for its final Federal Open Market Committee (FOMC) meeting of the year starting on Tuesday, market expectations are set mainly on a 25 basis points rate cut. It is speculated that the growing pace of rate cuts in the coming year may be slower than initially anticipated. Some analysts suggest that recent profit-taking has contributed to the oil price decline in the lead-up to the FOMC meeting. It’s worth noting that WTI prices surged over 6% last week, driven by the possibility of additional sanctions against Russia.