China driving crude oil price increases

Bulls on crude oil expect a 'very shallow' recession

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Published: January 18, 2023

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NYMEX March 2023 West Texas Intermediate crude oil (candlesticks) with 100-day moving average (black line) and ICE March 2023 Brent crude oil (blue open/high/low/close). (Barchart)

MarketsFarm — China has largely been behind the current upticks in global crude oil prices, according to Tom Kloza, global head of energy analysis for Oil Price Information Services in Lakewood, NJ.

He suggested that China’s economy will begin to pick up steam in 2023 after the government loosened its super-tight COVID-19 restrictions.

“You can call it ‘the China syndrome’ but there’s a consensus view that China’s reopening is going to ratchet crude oil demand,” Kloza said.

China said recently that its economic growth during 2022 was three per cent rather than the projected 5.5 per cent, pointing to its zero COVID policies for the slippage.

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Added to that, the International Energy Agency projected global demand for crude in 2023 will be a record 101.7 million barrels per day, up by nearly two per cent compared to 2022.

Contributing to the upward swing in crude prices are Russian oil supplies are set to become tighter during the year and there will be major movement in the oil market, according to Kloza.

“You also have speculative and investor money coming back into oil futures,” he said, noting that benchmark crude oils such as Brent and West Texas Intermediate closed higher for eight consecutive business days as of Tuesday. He said that’s likely the first time since 2019 that a rally of that length of time has happened. However, there was still the question of a global recession lurking in the background.

“I think a lot of people who are trumpeting higher oil prices think we are going to have a soft landing, in that there won’t be a big global recession. Maybe a very shallow one,” Kloza suggested.

With Brent in the neighbourhood of $86 per barrel and WTI around $81, those upticks have been running counter to the U.S. government’s means of calculating inflation — more so with gasoline prices climbing higher as well, Kloza said (all figures US$).

Running contrary to upward movement in crude and gasoline has been diesel fuel, as the Northeastern U.S. and Europe are having a warmer than normal winter, with Kloza calling it “the winter that wasn’t.”

Kloza suggested markets aren’t expecting any tight oil supplies during the first quarter of 2023 and the effects of China reopening its economy will be felt a few months down the road. He suggested that would occur sometime during the rest of the year.

Meanwhile, he said, North American production is fine and consumption across the continent has been dulled by a mild winter.

— Glen Hallick reports for MarketsFarm from Winnipeg.

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