Oil prices rebounded yesterday following two straight days of heavy losses amid rising Covid-19 cases in top crude importer China and growing concerns of a global economic slowdown, Bloomberg reported
Brent, the benchmark for two thirds of the world’s oil, stood 2.4% higher at $79.72 a barrel at 2.18pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, was up 2.47 per cent at $74.64 a barrel.
The report said both benchmarks fell more than 5% as at Wednesday after exceeding 4% declines the day before.
US pipeline operator Colonial Pipeline reportedly said its Line 3 had been shut for unscheduled maintenance, with a restart expected on January 7.
The Colonial pipeline, the world’s largest oil pipeline system, moves gasoline, diesel, and jet fuel from the US Gulf Coast to the US East Coast market. The Line 3 transports 885,000 barrels per day of crude products.
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World’s second largest economy, China, is reported to be grappling with its first national Covid wave, after the easing of its zero-tolerance approach last month.
“Near-term anxiety over the scale of Covid-19 infections in China is weighing against an otherwise bullish market outlook,” Edward Bell, a senior economist at Emirates NBD said in a research note yesterday
Futures have seen a sharp decline since the start of 2023, as investors continue to worry about China and the growing possibility of a recession. Based on current prices, Brent has lost about 9% of its value since December 30.
“We believe that China’s oil demand catch-up potential should not be overestimated because the recent setbacks were limited, the property market faces structural headwinds, and road fuel demand is exposed to a rapid electrification shift,” Norbert Rücker, head economics and next generation research, Julius Baer, said.
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The US dollar was reported weaker yesterday making oil cheaper for holders of other currencies. The US Dollar Index, a measure of the value of the greenback against a weighted basket of major currencies, was down 0.05% at 104.19.
It will be recalled that earlier this week, the International Monetary Fund’s managing director warned that a third of the world’s economies may slide into a recession this year.
US crude oil stocks rose by 3.3 million barrels last week, while gasoline stocks jumped 1.2 million barrels, according to market sources citing data from the American Petroleum Institute.
The indicator, which shows the level of oil and product stored, gives an overview of US petroleum demand. If the increase in crude inventories is more than expected, it implies weaker demand and is bearish for crude prices.
Minutes from the Federal Open Market Committee’s December meeting showed that the US Federal Reserve would continue to fight inflation and warned that “an unwarranted easing in financial conditions … would complicate the committee’s effort to restore price stability”.
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Officials also acknowledged that they had made “significant progress” in moving towards a “sufficiently restrictive” stance of monetary policy, according to a statement on the central bank’s website.
Last month, the Fed raised its interest rates by 50 basis points to curb inflation that hit a four-decade high in June 2022 and indicated that more increases are planned this year. The Fed raised interest rates seven times in 2022.
“One thing which is pretty much crystal from the event last night is that it will be wrong to think that the Fed will begin the process of interest rate cuts this year,” Naeem Islam, chief market analyst at AvaTrade, said.
“More importantly, the risk of a policy mistake taking place is once again sky-high.”
The next FOMC meeting will take place on January 31 and February 1, with markets expecting an increase of 25 basis points. On Wednesday, Swiss bank UBS said it expects Brent to trade at $110 a barrel in mid-2023, while WTI is estimated to average $107 a barrel.
China’s reopening may result in oil demand hitting a “record high” in the second half of this year, the Swiss lender said in a research note.
Also Read: Oil Prices Rise As China Relaxes Covid Restriction
“Meanwhile, Russian oil production should fall in 2023 due to the European Union’s embargo on Russian crude and refined products,” UBS strategists said.
An increase in production outside the OPEC+ group of countries is expected to be modest, given years of underinvestment in new oil and gas projects, they said.
In its December oil market report, the International Energy Agency increased its global oil demand growth estimate for 2023 based on rising crude consumption in India, China and the Middle East. The agency expects oil demand to grow by 1.7 million barrels per day in 2023, up from its previous estimate of 1.6 million.
By Bosco Agba
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