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Oil prices dropped nearly 2% due to fears of slowing economic growth in China, despite positive US inventory data.

China's recent interest rate cut and declining crude oil imports raise concerns about weakening demand.

Weak refining margins worldwide and warnings of lower Q2 earnings from major oil companies add to the downward pressure on prices.

Oil prices were trading down nearly 2% in early-morning trading on Thursday, with markets attempting to digest the impact of lagging Chinese consumption on other positive U.S. inventory reports against the backdrop of another interest rate cut by Beijing. 

At 6:50 a.m. ET on Thursday, Brent crude was trading down 1.77% at $80.26, while the U.S. benchmark, West Texas Intermediate (WTI), was trading down 1.80% at $76.19. 

Though this week saw another big U.S. crude inventory draw reported by the Energy Information Administration (EIA), the market remains focused today on the global economic outlook and China demand. 

Refinery margins worldwide are also taking a hit, with big refiners lining up ahead of earnings reports to warn investors of a weak Q2 earnings season. 

Throughout the year, China has seen crude oil imports on a downward trend, with refinery runs also trending lower, year-on-year, suggesting sustained economic growth weakness. 

On Thursday, China’s central bank cut interest rates again, lending more concern to analyst fears that demand is shrinking. The People’s Bank of China slashed rates from 2.5% to 2.3% on Thursday in a surprise move that is being interpreted as a response to weak economic growth. 

Also potentially weighing on prices is Wednesday’s news that Russia, Kazakhstan, and Iraq have established clear plans to compensate for overproduction to raise compliance with OPEC+ output cuts. According to OPEC, the entire over-produced volumes will be fully compensated for over the next 15 months through September 2025, with Russia ‘paying back’ a cumulative 480 kb/d, Iraq 1,184 kb/d, and Kazakhstan 620 kb/d.

Earlier this week, Exxon, Shell, and BP warned of flagging refining margins that will be reflected in Q2 earnings. On Thursday, European refiners French TotalEnergies and Neste also warned of sluggish demand and profit margin weakness. Earlier on Thursday, TotalEnergies reported a 34% drop in operating income for the quarter for its refining and chemicals arms.

By Charles Kennedy for Oilprice.com