Commodities: What Next For Oil As Demand Shifts?

Oil faces changing circumstances as China opens up and Russia faces further restrictions. What do you need to know and what do investors think?

• China demand increases on lockdown easing

• Russia increases output but faces further European restrictions ahead

• Oil price outlook for following six months

Following a sluggish start to the year and widespread market recession fears, crude oil has remained relatively stable so far this month. Oil has gained some ground because of the outlook for China and a weaker dollar, which makes commodities priced in that currency more alluring.

With sanctions and price limitations on Russian petroleum products slated to go into effect starting next month, there will be much more uncertainty.

Rise in China demand

China’s lockdown easing is expected to increase the demand of oil as the country returns to normal activity levels. Since China doesn’t report crude oil inventories, there us a lot of guesswork as to just how much crude the country has stashed over the past year. 

However, China are not a large producer of oil themselves, so there will always be a greater demand to import the commodity from elsewhere. Interestingly, as China reopened its borders in early January, authorities issued a massive batch of allowances for independent refiners to import crude oil. 

OPEC and the International Energy Agency (IEA) said in their respective monthly reports last week that the prospects of global oil demand were improving thanks to the Chinese exit from the ‘zero Covid’ policy. 

Russia’s export

Russia’s export saw a surge during the week ending January 13th, but export fell by 820,000 barrels a day the following week. This was a decline of 22%.

However, the four-week average (which can be used to smooth out peaks and troughs, rose higher. The figure stayed just above 3 million barrels a day for the second week running.

Overall crude flows are up, despite the potential of a European ban of Russian seaborne imports. From Feb. 5, the European Union, the G-7 and its allies will attempt to impose a cap on the price of Russia’s fuel exports — the latest punishment for its invasion of Ukraine. That will coincide with an EU prohibition on almost all imports of Russian oil products.

What do investors think?

Although China’s Luna New Year didn’t outweigh US stockpiles, investors are overall bullish on oil for the following six months.

“Early indications suggest that there has been an increase in activity, which means that the economy could perform better,” said Craig Erlam, analyst at Oanda Corp.

Meanwhile, hedge funds and other money managers purchased the equivalent of 89 million barrels in the six most important petroleum contracts over the seven days ending January 17th, the fastest rate in over two years and a sign that fears about a global recession are easing somewhat.

From a technical standpoint, oil does have some bullish signals. Firstly, it is out of a weekly downtrend, signalling a possible reversal.

The price held above its low at the start of the year and is now trading above its 50-day moving average, although the 100-day moving average is providing some resistance at 81.60.

A higher move in crude’s price could target a high volume area at 88.00 and also test a pivot price at 93.00.

93.00 was support during the initial run and has acted as resistance since the selloff in July and August.

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