Oil prices edge higher as investors weigh China's demand outlook against supply dynamics

Crude prices rose close to $140 per barrel last month after Russia’s military offensive in Ukraine

A pump jack is silhouetted against the setting sun in Oklahoma City. oil prices have given up most of the gains since Russia's military offensive in Ukraine. AP Photo

Oil prices rose on Tuesday, after two days of losses, as investors continue to assess potential European sanctions on Russian energy and the impact of China’s Covid-19 outbreak on global demand for crude.

Brent, the global benchmark for two thirds of the world's oil, was trading 1.2 per cent higher at $103.50 per barrel at 8.30am UAE time. West Texas Intermediate, the gauge that tracks US crude, was 0.9 per cent higher, but still below the $100 level, at $99.45 a barrel.

"The black gold is moving to the upside today, and traders feel less anxious about Chinese demand. One thing that traders will be looking at very closely regarding oil demand is the outcome of the mass Covid testing that is taking place across China's largest cities," said Naeem Aslam, chief market analyst at Avatrade.

"If the results are unsatisfactory, the government could force a lockdown which will be highly disastrous for oil demand. On the positive side, if the results continue to suggest that things aren't worse, we could see a strong rally in oil prices."

Oil prices have taken a battering in recent weeks amid concerns for demand outlook and co-ordinated efforts by the US and the International Energy Agency to improve supply.

Crude prices, which rose close to $140 per barrel last month after western sanctions were imposed on Russian energy imports due to Moscow’s military action in Ukraine, have given up the most gains. But traders expect prices to shoot higher again as the US and its allies consider widening their sanctions to include Russian oil and gas exports.

Although oil markets were sold heavily on the “China risk-aversion trade, as growth fears fed through to lower oil demand calculations”, geopolitical risks remain, said Jeffrey Halley, senior market analyst, Asia Pacific at Oanda.

“I have reservations that potential European energy sanctions on Russian oil and natural gas can be ignored for long. Nor can the impact from the Ukraine war and Russia’s exclusion from global energy markets,” Mr Halley said.

“Weaker China growth or not, energy supplies remain constrained with geopolitical risks very elevated. The week also has plenty of binary outcome risk from the week’s data calendar internationally, especially US earnings, which could swing prices either way.”

China, the world’s second-largest economy and biggest crude importer, is experiencing a wave of Covid-19 infections and has introduced strict movement curbs in Shanghai, its largest city, to control the spread of coronavirus.

New cases have also been detected in China’s capital Beijing as the government continues to carry out mass testing to isolate every infected person as part of its “zero-Covid” strategy.

Officials on Monday said they will widen the mass testing campaign to millions more in an additional 11 of Beijing’s 16 districts. A weeklong lockdown in Shanghai is also stoking concerns about the country's oil demand outlook.

Earlier this month, the IEA cut its demand forecast for 2022 due to Covid-19 lockdowns in China and weaker-than-expected demand growth in advanced economies, especially the US.

Opec has also lowered its supply and demand forecasts, in its monthly market report, over concerns about the Russia-Ukraine war and lockdowns in China that could stymie consumption.

Mr Halley, however, said despite lower demand projections, Brent will remain in a $100-$120 per barrel range, with WTI trading in the $95-$115 range.

“I am sticking to my guns”, he said. “That said, a few more negative headlines from Beijing regarding Covid restrictions could shift the balance decisively lower this week.”