Oil prices climbed on Monday afternoon, supported by hopes of higher energy demand in China. Both grades rose more than 3% last week, helped by news of the Keystone pipeline shutdown, which was forced by an oil leak.
Brent crude for February delivery rose 1%, to close at 79.8 dollars a barrel on the London ICE Futures Exchange. The West Texas Intermediate (WTI) for January delivery climbed 1.2%, to settle at 75.19 U.S. dollars a barrel on the New York Mercantile Exchange.
China is encouraging
The Chinese government at the end of last week unexpectedly announced that it sees "high quality" economic growth as the core focus in the coming year, so it is going to contribute to this in the coming months. For example, the Chinese authorities promised to take all measures to significantly increase domestic consumption. In fact, these confident speeches have boosted the morale of investors, who believed in the sincerity of Beijing and supported oil quotes in all charts.
However, China still has the coronavirus on its mind. For example, there are mentions in the media every now and then that the easing of quarantine measures, which Chinese residents wanted so much, turned into a surge of infection in the country for them. The country's chief epidemiologist has reiterated that three waves of infections will hit the country in the next three months. Moreover, the first of these has already begun.
And this is certainly bad news for oil prices. If the Chinese media starts reporting again that the cases rate is on the rise, big-city residents will have to forget about lifting the restrictions. And if they do, we won't be able to expect a full-blown business recovery there either.
This week, authorities in many large cities have already announced that they will be extending online classes in schools. But all these negative aspects, most likely, are no longer perceived by the commodity market to the extent that they were perceived recently. Investors understand that the easing of the "zero-Covid" policy in China is overdue, the authorities will be forced to concede to the demands of its residents, the only question is the timing of implementation.
China, which is the second largest consumer of oil in the world with a share of about 14%, has a very strong influence on the balance on the world platforms. The less restrictions in China, the more hope for high demand for fuel and the higher the price of oil.
The U.S. has sold too much oil to other countries, it's time to make up for it
But that is not the only factor benefiting oil prices. No less significant was the decision of the United States to start replenishing the Strategic Petroleum Reserve (SPR).
Before that the country authorities sold a huge amount of its reserves - all of 180 million barrels. And they did it in order to reduce the price of high-priced gasoline and to balance the market in general. As a result of this "wastefulness," the level of strategic reserves in the U.S. has dropped to the lowest level which was last observed in the country in 1984.
Now the Department of Energy is changing the strategy and is going to buy a trial batch of 3 million barrels under a new scheme and use contracts with a fixed price. These contracts will be signed no later than January 13, and it is planned to implement the delivery in February next year.
The consignment of 3 million barrels is not essential for the market balance, but the purchase itself is already a signal that prices will rise. The SPR operator will no longer be a major seller but a pretty big buyer.
The number of oil rigs in the U.S. declined by 5 to 620 last week, according to Baker Hughes. In short, all the growth that had been observed in the US since the beginning of November suddenly came to naught. The number of active oil rigs also declined in Canada - by 7 to 124. Actually, this is happening as part of the seasonal decline in activity ahead of the Christmas holidays.
Anyway, the growth of drilling activity on the American continent remains rather restrained, and does not provide reasons for the global revision of the production forecasts for the next year. According to the EIA, oil production in the U.S. will increase to 12.6 million barrels per day by December 2023.
What to expect for oil prices in the coming year?
As for oil prices in the coming year, Commerzbank, for example, predicts that oil will rise strongly again in the first half of 2023. This is expected to be affected by tensions in the oil markets, mainly because of the European Union embargo on Russian oil. In November about 11% of all the oil imported in the EU countries was Russian oil, and now it will have to buy it in some other countries.
The introduction of a price ceiling for Russian oil is another factor that raises the prospects of growth in the cost of oil. The more so because Russia has already threatened to stop all deliveries to those countries that agree to these restrictions.
The International Energy Agency (IEA) expects Russia to cut oil production by about 1.8 million barrels per day due to the abandonment of its resources, and this will happen approximately by the end of the first quarter of 2023. By the way, even until recently, Russia has not reduced production, because the decline in exports to the EU was more than offset by increased supplies to China, India and Turkey.
Analysts at Commerzbank believe the global oil demand will be 2.5 million barrels a day higher than it is now at the end of next year. It is likely that demand will still exceed supply somewhere from the middle of 2023. At that time, low inventories will continue to decline.
Commerzbank predicts that by mid-2023, Brent contract prices will rise back to $95 per barrel on the charts. If prices do not recover as expected, OPEC+ countries will decide to cut production even further. Prices below $80 a barrel are too low for the cartel at the moment.
