Market analysts expect oil prices to remain steady this week, offset by the Chinese recovery and the faltering pace of western economies.
Crude oil prices were range bound for much of February. Bullish supply-side concerns surrounding the war in Ukraine and China’s recovery from COVID lockdowns were offset by inflationary pressures in western economies.
West Texas Intermediate, the US benchmark for crude oil prices, has hovered in the mid-$70 per barrel range for the past month, well below the $90 range seen in October.
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However, crude oil prices rallied last week on strong economic data from China, the world’s second largest economy after the United States. Manufacturing activity is near a 10-year high and Friday’s data showed that China’s service sector is on the mend, showing its economy is in a rapid recovery after suffering from tight social restrictions , designed to control the spread of the novel coronavirus that causes COVID 19.
Jeff Mower, oil news director for the Americas at S&P Global Commodity Insights, said oil prices have been looking for a clear directional indicator, from inflation to production data. Factors such as a Chinese recovery may already be feeding into the market, he suggested.
Nearly 3,000 delegates gathered at China’s annual National People’s Congress over the weekend to review last year’s legislative achievements and set targets, including growth targets, for 2023.
Previewing the meeting, Scott Kennedy, the leading authority on Chinese economic policy at the Center for Strategic and International Studies, said in a recent press conference that much of China’s momentum is coming from investment by state-owned companies rather than consumers, suggesting the economic The situation actually looks “really problematic”.
“The bulls are now pointing to China’s National People’s Congress, hoping for signs of a more pro-growth strategy,” S&P’s Mower said of the meeting’s impact on crude prices. “But even if the NPC delivers, any expectations of further Fed rate hikes will continue to limit crude price gains.”
Federal Reserve Chairman Jerome Powell testifies before the House and Senate this week. Recent Dallas Fed survey results suggest the state’s manufacturing sector is likely to have shrunk for the first time since May 2020, although the latest national employment data shows hiring policies are being affected by the Fed’s tightening policies, which are slowing growth and raising inflation at the consumer level should contain, remains unimpressed.
The Fed needs to find a Goldilocks theme to avoid plunging the economy into a deep recession.
Phil Flynn of The Price Futures Group in Chicago said the “biggest risk to the oil market is a potential recession.” Ole Hanson, head of commodity strategy at Saxo Bank in Denmark, added that commodities from metals to crude oil lagged on lackluster US data.
“However, with some of these worries offset by surprisingly strong data out of China, the near-term outlook remains balanced with no clear driver yet emerging to significantly change the bull-bear standoff, which is particularly visible in the energy market, where crude oil has traded range bound since late November,” he said.
Closer to home, the Oil Price Information Service notes that there is “a lot of crude oil” in US inventories, with inventories inflated compared to the five-year average. This suggests that the world’s largest economy is still in some form of post-holiday sleep, which could leave oil prices between $70 and $83 a barrel.
“Unfortunately, until something backs down, we’re going to be stuck in this area,” said Denton Cinquegrana, senior oil analyst at OPIS.
Powell’s testimony aside, this week is packed with data, from the latest fourth quarter GDP readings in the Eurozone to factory orders in the US economy. The Department of Energy, meanwhile, will update its full-year outlook on Tuesday. Data on Chinese inflation year-on-year through February will be released on Wednesday.
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