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Demand outlook for crude oil dims amid China worries

by Başak Ceylan - bceylan@chemorbis.com
  • 22/11/2022 (09:46)
Crude oil prices logged their second consecutive weekly decline last week, dropping by around 9-10% on the week amid worrying signs over a resurgence of Covid-19 concerns. As oil energy demand outlook darkened over this news, the attention turned towards the supply front, where OPEC+ cuts and the approaching EU embargoes on Russian crude and oil product imports stay at the fore.

Oil ends last week with drop of 10%

West Texas Intermediate crude for December delivery settled at their lowest since late September on last Friday, decreasing by 10% for the week. January Brent crude oil on ICE Futures Europe also settled at the lowest since late September on Friday and it was lower by nearly 9% for the week.

Markets tumble as infections surge in China

A key market driver last week was increasing demand concerns, largely due to rekindled zero-Covid policy in the world’s biggest oil importer. Media sources reported “a sevenfold surge” in infections during the past two weeks in several areas in China. The State Council reportedly urged local authorities to avoid “irresponsible loosening” of measures as the country faces its strongest wave of Covid-19 in six months.

It was only a week ago that China relaxed its zero-Covid rules. However, the first Covid death in six months in the capital city of Beijing led local officials to immediately revert to a de facto lockdown, which included shutting schools across several Beijing districts and calling residents to stay at home.

Oil adds to losses during Monday trading on speculations over OPEC output hike

As market investors weighed tightening Covid restrictions amid surging infections in China, global benchmark Brent crude oil hovered near $86/bbl, while WTI for December delivery declined below $80/bbl during intraday trading on Monday.

Although news reports speculating that Saudi Arabia and other OPEC oil producers were mulling an output increase drove Brent crude oil below $83/bbl on Monday, a rebuttal from Saudi Arabia helped oil prices pare some of the losses incurred earlier in the session.

Goldman Sachs downgrades oil forecast

Concerns regarding Chinese oil demand also prompted Goldman Sachs to lower their oil price forecast this week. The US investment bank downgraded their forecast by $10 to $100/bbl for the fourth quarter of 2022, citing the rising cases in China.

Goldman Sachs also cited the supply side of the matters, highlighting “a lack of clarity on the implementation of the G7′s price cap”. The leaders of the world’s leading western economies had agreed in principle on the price cap in September, with final details of its implementation still being finalized.

Supply outlook shaped by OPEC+ cuts, EU embargo

The supply side remains blurry as traders are still unsure how much Russian crude oil is going to disappear from the market once the EU bans Russia’s crude imports starting from December 5, and oil products from February 5.

OPEC+ supply in the next few weeks also remains to be seen as investors try to gauge how much output will be cut following the announcement of a 2-million-barrel reduction.

Media sources cited tanker-tracker Petro-Logistics as saying that OPEC exports were significantly lower in the first half of the month, which suggested that the cartel was actually delivering on the output cut agreed on October 5.
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