Oil prices buoyed by strong China GDP, Fed jitters limit gains

By Ambar Warrick

Investing.com -- Oil prices rose in Asian trade on Tuesday as stronger-than-expected GDP data from China boosted optimism over a demand recovery in the country, although fears of rising U.S. rates and a stronger dollar kept gains limited. 

China’s economy grew more than expected in the first quarter of 2023, indicating that an economic rebound was on track after the lifting of anti-COVID measures earlier this year. The reading also bolstered bets that a recovery in China will drive oil demand to record highs this year.

But on the other hand, uncertainty over just how much the Federal Reserve will hike interest rates kept sentiment towards oil markets on a short leash. Hawkish comments from Fed officials, as well as some signs of resilience in the U.S. economy, saw markets rethink their expectations for an imminent pause in the Fed’s rate hike cycle.

Brent oil futures rose 0.3% to $84.98 a barrel, while West Texas Intermediate crude futures rose 0.3% to $81.03 a barrel by 22:44 ET (02:44 GMT). Both contracts sank nearly 2% on Monday, their sharpest fall in a month.

Crude markets were also under pressure from a resurgence in the dollar, which staged a strong recovery from one-year lows in recent sessions. The greenback steadied against a basket of currencies on Tuesday, while Treasury yields also firmed. 

Fed Fund futures prices show that markets are pricing in a nearly 90% chance that the Fed will hike rates by 25 basis points in May. Markets are also positioning for a 23% chance that the Fed will hike again in June, although a majority of expectations are still skewed towards a pause. 

Focus is now on a slew of Fed speakers in the coming days, before the bank enters its pre-meeting blackout period. The Fed is set to announce its decision on interest rates on May 3. 

While oil prices had a strong run after the Organization of Petroleum Exporting Countries (OPEC) unexpectedly cut supply earlier this month, concerns over slowing economic growth, especially as interest rates rise further, cut short a bigger rally. 

China’s economic recovery has also been largely uneven so far this year, with the manufacturing sector, which is considered a bellwether for the economy, having largely struggled to remain in expansionary territory.

Data on Tuesday showed that industrial production missed expectations for a second straight month in March, while investment in the property sector also slowed. Prolonged weakness in the manufacturing sector could hamper a bigger economic recovery this year.