Crude Oil Testing Multi-Week Resistance on Positive Chinese Outlook
Crude Oil Testing Multi-Week Resistance on Positive Chinese Outlook
A weaker dollar and optimistic China demand have combined to push crude oil prices higher this week, despite the continued rise in weekly EIA inventories. Amid a broader economic recovery, oil demand is expected to grow by 1.3 million bpd in 2023, according to IEA estimates, as the easing of Covid restrictions in China boosts global oil demand.
The IEA is also expecting the removal of pandemic travel restrictions will help to increase air travel and fuel use in China, which has been under pandemic lockdown since late December. However, with the market technically overbought and a Fed meeting this week and a stronger dollar in focus, we suspect some profit-taking will be needed to drive prices back to key support levels.
OPEC Secretary-General Haithan Al-Ghais says he is “cautiously optimistic” about the global economy and the outlook for oil demand. His optimism is tempered, however, by concerns about the stability of other regions, such as China, and by the recent rise in US crude production.
This has pushed the ICE Futures index of global oil prices above $90 a barrel, its highest since early December. This is a strong indication that markets are seeing signs of an improving global economy and that OPEC members will continue to work together to maintain price stability.
Expectations for a further reduction in Russia’s seaborne shipments of petroleum products to the EU are also supportive of further demand growth in the coming months. Traders are monitoring the impact of European Union sanctions on Russian sales, which some warn could be more disruptive than past restrictions and whose effects could have a bigger impact on global supply than previously thought.
On the other hand, a slowing Chinese economy, which is still reopening after a prolonged pandemic lockdown, will dampen industrial output and may limit reflation efforts in the near term. This will weigh on oil demand, but it is unlikely to have a material negative effect on the overall price of crude over the medium to longer term.
In the meantime, a weaker dollar and expectations for further easing of travel restrictions in China should boost global oil demand next year, putting the market back in balance. This is also in line with OPEC’s long-term forecast of an average Brent price of $90 per barrel, but we remain cautious about any potential short-term market reaction to a possible delay in Fed rate hikes.
Buying interest remains strong, with more than 127 million barrels of the benchmark Brent contract bought in the two weeks to January 24. Speculators are selling some of that inventory, which is contributing to the market’s recent slide below the key level of $89 a barrel.
With the Fed, ECB and BoE all expected to raise rates later this week, it is important to remember that a rate hike is not a panacea for the economy. A weaker dollar and a more robust economic recovery will be needed to boost the price of crude oil.
