Oil begins 2023 with 4% plunge as China to IMF spook trade

By Barani Krishnan

Investing.com -- It’s looking to be a happy new year for oil bears thus far as tumbling China factory activity and IMF warnings of a global recession signaled pain at least in the near term for those long on the crude trade.

U.S. West Texas Intermediate crude for delivery in February settled down $3.33, or 4.1%, at $76.93 per barrel, after dropping to as low as $76.64 earlier. WTI, as the U.S. crude benchmark is known, finished 2022 up 6.7%.

U.K.-origin Brent crude for delivery in February settled down $3.81, or 4.4%, at $82.10 per barrel, after a session low at $81.80. Brent ended last year up 10.5%.

Chinese manufacturing activity shrank for a fifth straight month in December, a private survey showed on Tuesday, as the country grappled with an unprecedented spike in coronavirus cases after it relaxed some restrictions intended to prevent the spread of the virus. 

President Xi Jinping recently said that China’s economy grew 4.4% in 2022 - a figure much higher than markets anticipated. But he also noted that the country faces increased headwinds from the COVID-19 pandemic in the coming months.

The figures provide a snapshot of the challenges faced by Chinese manufacturers who now have to contend with surging infections after the country's abrupt COVID policy U-turn in early December. People in China’s biggest cities have braved the cold and a rise in COVID-19 infections since the start of the year to return to regular activity, raising hopes for an economic boost in the world’s largest importing nation. China has raised its first batch of 2023 export quotas for refined oil products by nearly half versus a year ago to spur refinery output, capture strong export margins and adapt to slow domestic demand.

Recession fears are also back at the front and center of crude markets with the International Monetary Fund kicking 2023 off with a tough warning that the world’s three main growth centers — the United States, Europe and China — were all experiencing weakening activity.

“The outlook (for crude) remains highly uncertain though which should ensure oil prices remain highly volatile,” said Craig Erlam, analyst at online trading platform OANDA.

Tuesday’s plunge in crude prices came ahead of a decision on global production expected from OPEC+, which groups 23 of the world’s oil producers in an alliance led by Saudi Arabia and co-steered by Russia.

OPEC+ has faced challenges to keeping oil markets higher after a G7 price cap of $60 per barrel on Russian sea-borne crude that Moscow has objected to but done little to offset.

“The G7 price cap has had little impact so far, the same can be said of Russia's response,” noted Erlam. “But that could change if oil prices keep moving higher, nudging Russian crude ever closer to the cap level and forcing some very difficult decisions.”

In the United States, this week’s greater focus will be on Friday’s US nonfarm payrolls report for December. The jobs report is the first top-tier release of 2023 before next week’s more important Consumer Price Index, or CPI, report.

The jobs report is critical as the Federal Reserve faces a dilemma on whether to keep up with monetary tightening to get inflation to its preferred level or let up on aggressive rate hikes to shield the economy from a slowdown. Higher inflation and rising interest rates have hit the housing sector – and could next hit the labor market, which has shown stupendous growth for the past two years, since the world came off the worst of pandemic. On the other hand, eight nonfarm payrolls reports have exceeded economists' estimates, so another positive surprise cannot be ruled out.

Economists expect an increase of 200,000 jobs, which would be lower than the 263,000 reported for November, but still healthy by US labor market standards. Before the pandemic, American jobs grew by just under 200,000 a month.

In order to see salary growth cooling, “the labor market would need to expand at a pace of under 100,000 or even suffer job losses”, said Yohay Elamm, analyst at FXStreet.

“In such an ‘as-expected’ scenario, markets would wobble, and the US dollar could gain some ground in response to uncertainty about the Fed's next moves,” Elamm added. “The greenback attracts safe-haven flows. However, many investors would likely keep their powder dry ahead of next week's all-important CPI report.”

The dollar has been another wildcard for commodities, rebounding on Tuesday after weak finishes in the last two trading days of 2022 that helped boost oil’s year-end rally as markets priced in the possibility of smaller Fed rate hikes this year. The central bank is widely expected to raise rates by 25 basis points when it meets in February, amid increasing signs that U.S. inflation has peaked. Last year, the Fed raised rates by 425 basis points in all.