Crude oil (CL) futures
Fundamental Analysis

Oil Gains as China’s Demand Overshadows US Inventories Build

  • China’s oil demand forecast has brightened.
  • There are worries about the impact of sanctions on Russian crude production.
  • Crude stockpiles increased by 19.0 million barrels last week.

Although increases were modest ahead of incoming inflation data from the United States, oil prices increased on Thursday, adding to gains from the previous session as China’s demand forecast brightened.

Oil rises despite stockpile build (Source: Bloomberg)
Oil rises despite the stockpile build. (Source: Bloomberg)

On Wednesday, oil prices increased by 3% to a one-week high as optimism about the state of the world economy and worries about the impact of sanctions on Russian crude production overshadowed a huge unexpected increase in US crude stocks.

Crude stockpiles increased by 19.0 million barrels last week. This was the third-largest weekly increase in history and the greatest since stocks rose by a record 21.6 million barrels in February 2021.

Following the lifting of tight COVID-19 restrictions, top oil importer China is reopening its economy, bolstering expectations that gasoline demand will increase in 2023.

Despite production and logistical setbacks caused by COVID-19 curbs, China’s industrial output is projected to have increased by 3.6% in 2022 compared to the previous year, according to the Ministry of Industry and Information Technology.

According to Serena Huang, head of APAC analysis at Vortexa, “there is continued optimism in the oil market spurred by China’s reopening, and as the Chinese New Year approaches, increased travel should bolster gasoline and jet fuel demand.”

Despite a 192% increase from the same period last year, China’s outbound airline bookings were only at 15% of pre-pandemic levels so far in the week after the announcement that the country will reopen its borders.

However, according to Teng of CMC Market, upcoming US inflation data is a significant risk factor for oil. Trading is becoming more cautious ahead of the data release on Thursday.

According to economists, the annual growth rate in core US consumer prices will drop to 5.7% in December from 6% in November. Headline inflation from month to month is seen at zero.

Additionally, as the European Union (EU) continues to work on new sanctions against Moscow for the war in Ukraine, the market is preparing for new restrictions on the sale of Russian fuel products scheduled to take effect in February.

According to the US Energy Information Administration, the EU’s planned seaborne import restriction on Russian petroleum products on February 5 may cause greater havoc than the earlier EU prohibition on imports of Russian crude oil that went into effect in December.