Oil prices rebound on hopes of growing China demand and cooling US inflation

Oil prices ended the trading week with their biggest weekly gain since last October, amid cooling inflation in the US and an improved outlook for growing demand from China, the world's biggest crude importer.

Brent, the benchmark for two thirds of the world’s oil, ended trading on Friday up 1.49 per cent to settle at $85.28 a barrel, while West Texas Intermediate, the gauge that tracks US crude, was 1.88 per cent higher at $79.86 a barrel.

Brent rose roughly 7 per cent last week and gained in four consecutive trading sessions. WTI is also up by more than 7 per cent, having advanced to recoup most of the previous week's losses.

"Crude prices are poised for a weekly gain as the global economic outlook improves following China’s reopening," said Edward Moya, senior market analyst at Oanda.

"Energy traders are starting to price in a little bit more crude demand coming out of Europe and not just China. The oil market is looking like it will remain tight as the world’s two largest economies respective outlooks have dramatically improved over the past couple of weeks: the US might have a shallow recession and China’s reopening is gaining momentum."

Inflation in the US continued to slow in December, easing pressure on households and businesses as the Federal Reserve is set to continue raising borrowing costs this year.

The consumer price index increased by 6.5 per cent annually last month, down from 7.1 per cent in November, the US Bureau of Labour Statistics said on Thursday.

It was the smallest 12-month gain since October 2021. On a monthly basis, the CPI decreased by 0.1 per cent in December.

“The broad risk-on moves overnight in response to the US CPI print will help commodities generally, with [the] oil market getting an extra support from an anticipated increase in China’s demand this year,” Daniel Richards, Mena economist at Emirates NBD, said in a research note on Friday.

China’s near-total reversal of border controls — introduced to stem the spread of Covid-19 — came into effect last weekend.

The reopening ended about three years of strict entry requirements that had slowed growth in the world’s second-largest economy and biggest crude oil importer.

China’s crude imports are set to increase by 1.1 million barrels per day in 2023, compared with last year, with the country reopening and issuing new product export and crude import quotas, Energy Aspects said in a report earlier this week.

The consultancy, which expects Brent crude to average $100 a barrel this year, also raised its China oil demand estimate for the second quarter by 500,000 bpd.

“The multiplier effect on the rest of the region should not be underestimated. For instance, 25 per cent of South Korean petrochemical exports are linked to the health of the Chinese economy while 20 per cent of Thailand’s tourism is linked to air travel from China,” said the consultancy.

Japanese bank MUFG projects Brent to hit $110 by the middle of 2023 before averaging $101 a barrel this year, with the supply side expected to “begin to bite” in the second half of the year.

“It has been a painful start to the year for crude oil, with financial markets still pricing in a recession despite the physical market pricing in supply scarcity,” said Ehsan Khoman, head of research for commodities, environmental, social and governance, and emerging markets at MUFG.

“China reopening, the recovery in aviation, an acceleration in Russian oil decoupling, the slowdown in US shale, tightness in the diesel market, the end of US SPR [Strategic Petroleum Reserve] releases, still low levels of capex investment — all play a role in this,” said Mr Khoman.

“Critically, with little buffer in the system, we expect demand to hit a price-inelastic supply curve again.”

Hopes of softer interest rate increases by the US Federal Reserve have also supported prices after Brent fell by more than 8 per cent in the first week of 2023, its biggest loss in the first seven days of a new year since 2016.

Last month, the Fed raised its interest rates by 50 basis points to curb inflation, which hit a four-decade high in June 2022. The US central bank indicated that more increases were planned this year.

The Fed raised interest rates seven times in 2022.