Oil’s rough start to the year worsened as a deteriorating demand outlook came to the fore, buttressed by China’s near-term struggles with Covid-19, milder winter weather and US refinery disruption.
(Bloomberg) — Oil’s rough start to the year worsened as a deteriorating demand outlook came to the fore, buttressed by China’s near-term struggles with Covid-19, milder winter weather and US refinery disruption.
West Texas Intermediate fell as much as 3.5% to below $75 a barrel after posting a 4.2% drop on Tuesday, the most since November. Brent, the global benchmark, slid below $80 on Wednesday.
A rising death toll in China following the swift easing of virus curbs is overwhelming crematoriums, and there are warnings of more casualties heading into the Lunar New Year. Above-average temperatures in the US and Europe, meanwhile, are easing fears of an energy crunch.
Crude’s dwindling levels of open interest have left it open to sharp swings in recent months, and a failed attempt to break above its 50-day moving average this week has done little to improve the technical picture. While sanctions against Moscow over Russia’s war in Ukraine dragged its oil flows to 2022 lows late last month, that’s been of little relief to bulls so far this year.
The impact of a pre-Christmas freeze that hobbled refinery capacity in some parts of the US should also become clearer in inventory data this week, with the industry-funded American Petroleum Institute’s figures due later. In the short-term, that has lowered crude processing capacity in North America and is also weighing on prices.
“We’ve seen these big freeze-offs in the US and that has meant that the crude balance has actually weakened,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said in a Bloomberg TV interview, referring to US refinery closures due to cold weather. “There’s a few more weeks of softness I would think.”
Warnings that a US recession is on the cards and China’s surging virus cases continue to cloud the demand outlook, but in the longer term China’s reopening should prove more bullish for markets, Sen said.
“People are underestimating China’s reopening and the multiplier effect on demand,” she said. “Bad news for inflation, but it is definitely something to watch out for.”
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–With assistance from Jonathan Ferro, Tom Keene and Lisa Abramowicz.
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