Oil Edges Lower as Traders Weigh China Outlook in Sparse Trading

Jan 23, 2023 by Bloomberg
image is BloomburgMedia_ROWT6WT0AFB601_23-01-2023_05-00-06_638100288000000000.jpg

Oil well facilities at the South Belridge Oil Field in Missouri Triangle, California, U.S., on Friday, April 29, 2022. Oil is poised to eke out a fifth monthly advance after another tumultuous period of trading that saw prices whipsawed by the fallout of Russia's war in Ukraine and the resurgence of Covid-19 in China. Photographer: Ian Tuttle/Bloomberg

Oil edged lower, with many Asia-based traders offline for holidays to mark the Lunar New Year, as investors assessed the outlook for demand following China’s reopening and risks to Russian output in 2023.

West Texas Intermediate eased toward $81 a barrel following two weekly gains that saw the US benchmark close at the highest level since mid-November. Oil trading in Asian hours will be held back on Monday, with national holidays in markets including China, Hong Kong and Singapore.

  

China’s shift away from Covid Zero has bolstered expectations that consumption in the largest importer will expand. Following the pivot, many more Chinese people traveled back to their hometowns for the lunar festival this year, and industrial activity is expected to pick up when workers return.

Oil has shaken off a weak start to the new year to move higher as China’s outlook brightened. Additional support for crude has come from expectations that the Federal Reserve is close to ending its series of aggressive rate hikes, which has weakened the dollar. Traders are also weighing the impact of additional curbs on Russian energy flows as the war in Ukraine grinds on.

SLB, the last of the major oilfield-service providers doing business in Russia, warned last week that drilling and related work in the country will slump this year as its international isolation deepens. In its latest outlook, the International Energy Agency said Russia will shut in about 1.6 million barrels a day of production by the end of this quarter compared with pre-invasion levels.

US Treasury Secretary Janet Yellen expressed confidence at the weekend that restrictions on Russian sales of crude oil can be expanded to refined petroleum products, while acknowledging that the task will be more complicated. The next batch of restrictions is scheduled to come into force on Feb. 5.

Brent’s prompt spread — the gap between its two nearest contracts — remains in a bearish contango pattern, although the differential has narrowed in recent weeks. The spread was 5 cents a barrel in contango on Monday, compared with 58 cents a barrel a month ago.

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By Jake Lloyd-Smith

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