Oil Prices Rise as China Reopening Helps Demand Outlook

By Ambar Warrick

Investing.com-- Oil prices started the week on a strong note as the lifting of COVID lockdowns in a major Chinese city boosted optimism over an eventual demand recovery in the world’s largest crude importer.

The Chinese megacity Chengdu - which was the biggest city to face COVID lockdowns after Shanghai earlier this year - is set to begin scaling back a two-week lockdown from Monday. The move is expected to boost economic activity in the city, with the resumption of public and private transport likely helping fuel demand.

London-traded Brent oil futures rose 1% to $92.50 a barrel, while U.S. West Texas Intermediate futures rose 1.2% to $85.81 a barrel by 20:49 ET (00:49 GMT). Both contracts were recovering from three consecutive weeks of losses, amid concerns over a possible global recession.

Oil prices plummeted from highs hit earlier this year, as lockdowns in China, coupled with rising inflation and interest rates severely dented the outlook for demand this year. Chinese demand in particular suffered greatly as industrial production was suspended across several major hubs.

Supply gluts caused by a steady drawdown from the U.S. Strategic Petroleum Reserve, and supply increases by Russia, also pulled prices off annual highs.

Focus this week is on a U.S. Federal Reserve meeting, where the central bank is widely expected to raise rates by 75 basis points and signal more tightening to come. The move is also expected after U.S. inflation data read higher than expected in August, indicating that inflationary pressures in the country are yet to ease.

Both these factors are set to weigh heavily on economic growth, potentially hurting crude demand in the country. They are also expected to boost the dollar, making crude expensive for overseas importers.

Oil prices fell sharply last week after the U.S. inflation reading, while speculation over increased Russian supply also weighed.

Still, global oil demand is expected to benefit going into winter, with high natural gas prices pushing more countries to adopt oil for heating purposes.

U.S. gasoline demand has also shown resilience so far this year, and is expected to remain steady in the coming months.