Despite the presence of large stockpiles and a drop in the dollar, oil prices rallied this week. The New York-traded West Texas Intermediate (WTI) crude for March settled at $78.06 per barrel, down by 41 cents, or 0.5%, while the London-traded Brent crude for March delivery settled at $84.50, down by 59 cents, or 0.7%.
The U.S. crude benchmark rose nearly 7% in the past three sessions, nearly erasing last week’s 7.5% drop. This was caused by fears of recession and uncertainty in U.S. interest rate direction after bumper job and wage gains among Americans in January threatened to once again ratchet up inflation. Meanwhile, Brent crude also gained nearly 7% between Monday and Wednesday, after experiencing a 7.5% tumble last week.
Rally on China’s Return from Lunar New Year Break
The rally in oil prices was initially driven by the premise that Chinese refiners would add significantly to imports this month as the country returns from the long Lunar New Year break and into an environment free of COVID-19 restrictions, which had previously hampered demand. However, data supporting such a run-up is expected to emerge in the coming weeks.
The latest available data showed that China, the world’s largest crude importer, bought 10.98 million barrels per day (bpd) in January, down from December’s 11.37M bpd and November’s 11.42M bpd. Ed Moya, analyst at online trading platform OANDA, stated, “Energy traders are still waiting to see how robust China’s recovery will be. Air travel demand should pick up but some hesitancy from Chinese passengers over COVID fears remain and on high costs.”
Impact of Weeky Petroleum Status Report and Weaker Dollar
Despite the bullish sentiment, the Weekly Petroleum Status Report released by the U.S. Energy Information Administration showed large builds across crude, gasoline, and distillates. However, traders saw fit to send the market up another 1.7% on Wednesday, instead of using the data to correct crude’s 4% rally from the previous session.
Additionally, news that Turkey had resumed crude-oil flows to the Mediterranean export terminal of Ceyhan was promptly ignored. Operations at the 1 million barrel-per-day export terminal, which provides Azeri crude oil to international markets, were halted on Monday and were supposed to have remained shut until the end of Wednesday at least.
The weaker dollar has also been a remotely bullish factor for oil this week, although the greenback’s slide has been marginal as forex traders remained split over the near-term direction for U.S. interest rates amid sticky inflation.
In conclusion, the future of oil prices remains uncertain, with traders waiting for a clearer picture of China’s crude demand outlook. WTI crude is expected to remain below the $80 level until more information is available, and traders will be closely watching the Valentine’s Day inflation report to see if risk appetite can hold up. The presence of large stockpiles and a drop in the dollar may have a negative impact on oil prices, but the weaker dollar and China’s return from the Lunar New Year break provide some hope for the future of the oil market.