Oil bulls seize 2nd weekly gain on starry-eyed China forecasts

By Barani Krishnan

Investing.com -- Glowing forecasts of an economically-resurgent China helped oil bulls coast to a second winning week on Friday, with analysts saying the endurance of the rally will be decided by manufacturing and growth numbers due from the No. 2 economy later this month and next.

February, the most-active contract in New York-traded West Texas Intermediate, or WTI, crude settled up 98 cents, or 1.2%, at $81.31 a barrel.  March WTI, which Investing.com has already identified as the benchmark from the start of this week, settled up $1.03, or 1.4%, at $81.64. 

For the week, both the WTI contracts were up about 2%, following through with the rally of more than 8% from the previous week that canceled out a similar drop from the opening week of 2023. That left the month-to-date gain in WTI at under 2%.

London-traded Brent crude for March delivery settled up $1.47, or 1.7%, at $87.63, after a session peak at $87.75. Brent was up 2.8% for the current week and just over 2% for the month. 

“Crude prices had a good week as Chinese reopening optimism spearheaded this bullish move higher,” said Ed Moya, analyst at online trading platform OANDA. 

He, however, questioned whether global oil demand would continue to grow as recession risks rose.  

“It seems many energy traders are betting on that. The start of the Chinese New Year holiday will be closely watched to see if travel is as robust as many are thinking,” Moya added.

China’s so-called Lunar New Year celebrations officially run for a week from this Sunday. But factories in the country close for as long as two to four weeks. 

The lengthy closure often results in tepid manufacturing numbers for January and early February, although activity is also typically vibrant upon reopening. What could, however, impact this year’s post Lunar New Year activity is China’s lingering coronavirus situation, which health experts say is bubbling just beneath the surface and could erupt with the heightened social activity that comes with the celebrations.

China’s economy ended 2022 in a major slump. Factory activity in the country contracted in December at the fastest pace in nearly three years. The official manufacturing purchasing managers’ index (PMI) slumped to 47 last month from 48 in November, according to the National Bureau of Statistics. It was the biggest drop since February 2020 and also marked the third straight month of contraction for the index.

China’s non-manufacturing PMI, which measures activity in the services sector, plunged to 41.6 last month from 46.7 in November. It also marked the lowest level in nearly three years. And although the government has stepped up its support for the property market, the effects are still slow to take effect – home sales fell again in December.

The Paris-based IEA, or International Energy Agency, said on Wednesday that global oil demand could reach an all-time high in 2023 as China rolls back lockdowns and restrictions related to its tough COVID-zero policy.

Analysts say Beijing’s lifting of lockdowns and other COVID measures will, over time, help the Chinese economy normalize. But in the short term, there could be very high levels of new infections from the virus in the world’s largest population, with the spikes coming at a time when the economy is still vulnerable.

The Chinese people won their freedom from COVID incarceration by literally butting heads with the police. As much as they value that freedom, the idea of them continuing to travel to work (there is little work-from-home in China) when large swathes of the community around them are falling ill is debatable. 

The authorities in Beijing, having done a 180-degree turn from a COVID-zero to “COVID-anything” policy, are unsurprisingly indifferent as to whether they will institute new lockdowns if the virus situation worsens.

Absent mass immunization, China’s plan seems to be that mass immunity against COVID be achieved via mass infection. This was exactly what Beijing had been trying to avoid over the past three years, with super-cautious and stringent control measures. But now, the Chinese people’s wish to be free from COVID controls ought to come at a price, their government seems to have determined. Up to a million Chinese residents, especially the elderly and those with pre-existing ailments, could die from the virus over the next few months, health models have predicted.

China’s so-called COVID crisis 3.0 — coming after the primary breakout in 2020 and the evolving situation over the past two years with the pandemic — could coincide with the U.S. and Europe entering into a recession later this year.

Beyond that, any rally in oil and other commodities will depend on Federal Reserve monetary policy. Less aggressive tightening by the U.S. central bank would limit any upside in the dollar and could further boost prices (the dollar hit seven-month lows lately, fanning the run-up in copper and oil, among other commodities). 

But if the Fed remains stubborn in wanting rate hikes till inflation returns to its legacy 2% per year target (inflation is now at 6.5% a year, based on the December Consumer Price Index reading), then the rally in oil and other major commodities may just slow.