Oil steady amid China holiday, as “no news is good news”

By Barani Krishnan

Investing.com -- It’s China holiday week and for oil, that means the rest of the world trading blind-folded with the optimism that when the veil is lowered, crude prices will remain higher.

New York-traded West Texas Intermediate, or WTI, crude for March settled at $81.62, down just 2 cents, or 0.02%, on the day after last week’s 2% gain. Monday’s session high of $82.62 for WTI compared with the one-year low of $70.11 struck by the U.S. crude benchmark in early December. 

London-traded Brent crude for March delivery settled up 56 cents, or 0.6%, at $88.19, after last week’s rally of 2.8%. Monday’s session peak for Brent was $89.08, after the one-year trough of $75.11 in December for the global crude benchmark.

Crude opened to quiet but supportive trade on Monday amid China’s Lunar New Year festival that officially closes the country down for a week, with some factories and businesses likely staying shut longer. 

The Chinese holiday brings both trepidation and excitement to oil and other commodity markets. 

Consumption of oil and raw materials typically plunge at this time, causing a temporary blip in demand in the world’s largest importer of crude and most other commodities. 

On reopening, however, Chinese industries often see turbocharged-like operations that more than make up for what they did not consume during the holidays. This is what oil bulls are counting on, that China’s demand for crude will explode from February onward, heightening last week’s rebound on both WTI and Brent.

“The market also trades like…‘no news is good news’…and dips are being bought,” said Scott Shelton, energy futures broker at ICAP in Durham, North Carolina.

Despite the optimism, some are concerned that China’s post-Lunar New Year narrative could change this year and that is due to its still-evolving coronavirus crisis. 

Health experts expect huge spikes in COVID infections after the holidays as the Chinese people freely travel and mingle for the first time in three years following Beijing’s removal of safeguards put in place since the country’s first coronavirus outbreak in 2020.

China’s Ministry of Transport estimates over 2 billion passenger trips will take place during the Lunar New Year season, which in some parts of the country go on for as long as 40 days, as people return to far-flung hometowns for reunions. If true, that’s great for fuel demand.

On the other end, the number of COVID patients needing critical care in Chinese hospitals has peaked. Nearly 60,000 people died in Chinese hospitals between December 8, 2022 and January 12 from complications caused by the virus, after China abruptly scrapped, under public pressure, its “zero-COVID” policy.

The World Health Organization’s executive director for health emergencies Mike Ryan suggested earlier this month China’s health data “under-represent the true impact of the [coronavirus] disease” in terms of hospital and ICU admissions, as well as deaths.

That’s important because Wu Zunyou, chief epidemiologist at China’s Center for Disease Control and Prevention, said on Saturday – the eve of the Lunar New Year – that the present “wave of epidemic has already infected about 80% of the people” from the 1.4B population. He was implying that with such great numbers infected, China was probably heading to full immunity from the virus, meaning minimal risk of hospitalizations and deaths.

Those long oil will be counting on Wu’s prognosis to come true and that work gets off to flying start after the holidays. Crude demand in China could spike by as much as one billion barrels per day this year, as per a Reuters forecast, or two billion bpd, as reported by Bloomberg — depending what one wants to believe.

The facts show that 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 2022, 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.

Said John Kilduff, founding partner at New York energy hedge fund Again Capital:

“The oil bet on China is huge and people will be watching the country’s industrial data like hawks from next month to draw inferences on crude and fuel demand. Oil bulls will be praying that outright import numbers for crude as well as the country’s PMIs are higher-than-forecast in order to keep alive this premise of runaway demand. Without those, oil could go back to December lows.”

While a China demand surge would undoubtedly be bullish for oil, a potential recession in the United States and other major Western economies could hamper crude consumption this year. The U.S. and most of the Eurozone are struggling with elevated inflation and tight monetary policy, which are expected to persist through the year, forming the base for a recession.

The U.S. is to publish a first estimate of fourth-quarter gross domestic product on Thursday with analysts expecting the economy to have expanded by an annualized 2.6%, after 3.2% in the third quarter.

While this appears strong, more recent economic data have pointed to the economy losing momentum at the end of 2022 - retail sales fell by 1% or more in the last two months, industrial production declined for the past three and residential construction has posted six straight monthly declines.

GDP is expected to weaken in the coming quarters as the Federal Reserve’s aggressive rate hikes continue to hit demand.

The economic calendar also includes data on initial jobless claims, durable goods orders and new home sales on Thursday and the personal consumption price index on Friday.

Also in focus this week would be the standoff over the U.S. debt ceiling, which looks likely to loom large over financial markets as the U.S. earnings season continues. The U.S. government hit its $31.4 trillion borrowing limit on Thursday amid a row between hardline Republicans and President Joe Biden's Democrats over raising the country’s debt ceiling.