China is still the biggest driver of oil prices

Oil prices settled at 6 p.m. Thursday their highest level since December 1, as the market turns bullish on China’s oil demand this year.

Analysts say the reopening in China will boost oil demand and boost oil prices if most developed economies manage to avoid recession.

According to China, China likely accelerated the pace of crude oil stockpiling last year estimates by Clyde Russell, Reuters Asia Commodities and Energy Columnist, based on Chinese data on imports, domestic production and refinery throughputs.

More inventories in commercial and strategic storage could mean that Chinese imports may not be as strong as expected. But it could also mean that refiners are preparing for a surge in demand in the coming months, once the exit wave after restrictions are lifted.

Since China does not report crude oil inventories, it is all guesswork how much crude oil the country has stored in the past year.

When China reopened its borders in early January, authorities issued a huge amount of allowances for independent refiners to import crude oil.

Related: EIA Inventory Report Pushes Oil Lower

There is one certainty in the oil markets: economic growth in China is and will remain a key factor in global oil demand, which could push oil prices in either direction.

In recent days, the main driver of oil prices has been the reopening in China and the improved outlook for Chinese demand as a result of that reopening. OPEC and the International Energy Agency (IEA) said in their respective monthly reports this week that the outlook for global oil demand improved on the back of China’s exit from the ‘zero Covid’ policy.

China’s reopening will boost global oil demand a record high of 101.7 million barrels per day (bpd) this year, an increase of 1.9 million barrels per day from 2022, the IEA said in its report, estimating demand growth for 2023 by 200,000 barrels per day was increased from the expected growth of 1.7 million barrels per day in December.

“Two wildcards dominate the oil market outlook for 2023: Russia and China,” said the IEA said in its oil market report.

“China will drive nearly half of this global demand growth, even though the shape and speed of the reopening remains uncertain.”

OPEC also expressed more optimism this year about China’s oil demand and the global economy Monthly oil market report (MOMR).

China’s reopening is expected to boost demand, and “In addition, China’s plans to increase fiscal spending to aid economic recovery are likely to support demand for oil in manufacturing, construction and mobility,” said OPEC.

Global economies appear more resilient than previously expected, the cartel said.

“Global momentum in 4Q22 seems stronger than previously expected, potentially providing a solid foundation for the year 2023, especially in OECD economies. Growth for 2022 in both the eurozone and the US has beaten previous forecasts,” OPEC noted.

In addition, the US seems to have more chances to avoid a recession this year.

“Upside potential may come from the US Federal Reserve successfully delivering a soft landing in the US. This is the most likely outcome, given the expected slowdown in inflation and sufficient underlying demand dynamics.

Recession fears may have subsided, but the oil market continues to react with sell-offs on any weak economic data point from the United States, Europe or China.

Nevertheless, market sentiment has turned bullish on China over the past two weeks, resulting in rising oil prices. This highlights the fact that the Chinese economy and oil demand will continue to drive oil markets this year, alongside economic performance elsewhere, the magnitude of Russian oil supply losses and the OPEC+ group’s policy of balancing the market and the support prices.

By Tsvetana Paraskova for Oilprice.com

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