Crude Oil Testing Multi-Week Resistance on Positive Chinese Outlook

Crude oil prices broke out of a downward trend during the week of January 13, edging above US$82 a barrel. The move follows a largely bullish Chinese outlook that is boosting expectations of robust energy demand and refining activity. Optimism on Chinese growth, though, remains fragile, and demand and supply dynamics are still neutral.

The United States experienced a late December wintry blast that negatively affected refinery demand. However, the reopening of China for Lunar New Year celebrations should provide a tailwind to supplies. Meanwhile, the European Union plans to ban seaborne imports of Russian oil products starting in less than two weeks. This could also have a larger impact on Russian supply than initially thought.

Expectations of a US-China trade war were a major headwind for crude, but optimism on Chinese economic activity is supporting prices. Despite the positive news on demand, the physical oil market is still in a surplus. Inventories are at their highest level since June 2021, and are weighing on prices.

Crude oil stocks rose by 2%, according to the EIA, with distillate inventories dropping -1.9 million bbl. While OPEC+ members increased supply by 1.9 million bbl, non-OPEC+ producers like Canada and the United States grew by 1.9 million bbl, which offset the OPEC+ decline. IEA reported global oil demand climbed by 1.9 million bbl last month. Global oil demand is expected to expand by 1.3 million bbl per day next year.

In the United States, oil production is still at a record high of 12.2 million bpd, although it has fallen 0.9 million bpd from the all-time high of a year ago. As of the end of the week, the number of active U.S. oil rigs was at 627, a 2-1/2-year high.

China, meanwhile, reported a sharp increase in industrial production for the quarter. A weaker dollar helped support the price, as well as optimistic outlooks for the Chinese economy. On the positive side, the removal of pandemic travel restrictions, which had halted flights and prevented importing of commodities, bolstered Chinese expectations for domestic air travel during the Lunar New Year.

OPEC secretary-general Haithan Al-Ghais said last week that he was “cautiously optimistic” about the global economy. He noted that the outlook for China’s energy demand is tempered by concerns over its economy and the fragility of other regions.

A weaker dollar is another bullish factor for oil, as it makes crude oil cheaper for foreign buyers. It also helps to lower the risk of a recession in the US. Moreover, the Federal Reserve has recently indicated that it may end its aggressive rate hikes before the end of the year.

Overall, the long-term technical picture is looking good, and it should be possible for crude prices to resume their uptrend. Ultimately, the price of oil is likely to bounce back from its recent decline, as the Chinese outlook and weakening US dollar support prices. If the macroeconomic tailwinds turn out to be tailwinds, the first half of 2023 should be a transitional year for base metals and oil prices.