Oil prices fell Monday on the prospects of a return of Iranian oil to the market and data showing China’s economic recovery stuttering under COVID-19 restrictions.
Stock markets were broadly steady and the dollar traded mixed as investors digested the latest developments, including the surprise move by China’s central bank Monday to slash interest rates as a raft of data showed industrial production and retail sales growth for July came in lower than expected.
“The risk of stagflation in the world economy is rising, and the foundation for domestic economic recovery is not yet solid,” China’s National Bureau of Statistics warned.
Stagflation refers to long-running high inflation combined with rising unemployment and weak growth.
Beijing’s rigid adherence to a zero-COVID strategy has held back economic recovery as snap lockdowns and long quarantines batter business activity and a recovery in consumption.
Wall Street stocks initially fell following the Chinese data and a gloomy reading from the New York Federal Reserve Bank on regional manufacturing activity. But stocks had turned around by midday.
“The risk of a global recession is pretty high at the moment,” said FHN Financial’s Chris Low, adding that a silver lining of the weakening outlook is the expectation that the Federal Reserve could pivot more quickly and slow its efforts to raise interest rates to quell red-hot prices.
“The Fed will stop sooner if inflation goes away and it’s more likely to go away sooner with the global economy slowing,” Low said.
But the weakened Chinese economy weighed on oil prices, as did speculation that a revived nuclear deal could add Iranian crude to global markets.
US oil futures dropped nearly three percent to finish below $90 a barrel.
Iran said Tuesday it submitted a “written response” to what has been described as a final roadmap to restore its tattered nuclear deal with world powers.
Iran’s state-run IRNA news agency offered no details on the substance of its response, but suggested that Tehran still wouldn’t take the European Union-mediated proposal, despite warnings there would be no more negotiations.
“The differences are on three issues, in which the United States has expressed its verbal flexibility in two cases, but it should be included in the text,” the IRNA report said. “The third issue is related to guaranteeing the continuation of (the deal), which depends on the realism of the United States.”
A deal would mean that Iran’s crude output of 2.5 million barrels per day would no longer be subject to international sanctions, which would help relieve supply constraints that have been pushing up prices.
“Iran would flood the market,” said analyst Aditya Saraswat at energy research firm Rystad, who added the country could ramp up production by another million barrels per day.