Crude oil settles lower as China concerns offset Middle East tensions

Investing.com -- Oil prices fell Monday, retreating after early gains as ongoing worries about China's economy stoked fresh demand concerns offsetting a step-up in global geopolitical tensions.

By 14:30 ET (19:30 GMT), the U.S. crude futures traded 1.6% lower at $76.78 a barrel and the Brent contract dropped 1.4% to $82.40 a barrel.

China economic troubles return as Evergrande ordered to liquidate

A Hong Kong court on Monday ordered the liquidation of property giant China Evergrande Group (HK:3333), the world’s most indebted property developer, dealing another blow to investor confidence as China’s ailing real estate sector continues to weigh on its economy.

The health of the second largest economy in the world, and major energy market, has been a major concern in the wake of the COVID epidemic which hit China hard.

The official GDP figures showed that the Chinese economy grew 5.2% last year. However, strip out deflation, and nominal growth was just 4.2%, which excluding the pandemic-hit growth of 2.7% in 2020, is the lowest annual number since 1976.

The China-led demand concerns continued to dominate investor attention, overshadowing fresh geopolitical tensions that threatens to impact crude supplies.

Elevated Middle East tensions

Tensions remain fraught in the region, especially after a drone attack on U.S. forces in Jordan over the weekend.

This attack was by Iran-backed militants, according to the U.S. President Joe Biden, and resulted in the death of three U.S. service members, the first deadly strike against U.S. forces since the Israel-Hamas war erupted.

Iran has denied involvement in the attack, but it does raise concerns of a more direct confrontation between the two countries, potentially resulting in regional energy supply disruptions in the oil-rich Middle East.

“The conflict in the Red Sea is likely to add shipping costs, transit time and risk premium for some of the crude oil shipments and is likely to support crude oil prices,” said analysts at ING, in a note.

Dollar inches higher ahead of Fed meeting

The strength in the dollar also weighed on oil prices as investors looked ahead to the Federal Reserve's two-day meeting due Tuesday.

A stronger dollar makes oil, priced in the U.S. dollars, more expensive and lessens demands for holders in other currencies.

The Fed is widely expected to keep interest rates unchanged on Wednesday, but officials could provide indications that the battle against inflation has progressed sufficiently to begin cutting rates sooner rather than later.

There is also a lot of U.S. labor market data to study during the week, culminating with the January jobs report on Friday, with the economy expected to have added 177,000 new jobs, slowing from 216,000 the prior month.

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(Peter Nurse contributed to this report.)