Oil prices surge as China's reopening of borders eases demand concerns

Futures are also gaining on a weaker dollar

A trader at the New York Stock Exchange. US non-farm payrolls exceeded expectations as employers added 223,000 jobs in December. Reuters
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Oil prices climbed on Monday as China’s reopening of its borders eased concerns about fuel demand.

Brent, the benchmark for two thirds of the world’s oil, was 3.23 per cent higher at $81.11 a barrel at 4.10pm UAE time while West Texas Intermediate, the gauge that tracks US crude, was up 3.51 per cent at $76.36 a barrel.

China’s near-total reversal of border controls — introduced to stem the spread of Covid-19 — came into effect on Sunday.

The reopening ended about three years of strict entry requirements that had slowed growth in the world’s second-largest economy and biggest crude oil importer.

Futures have registered sharp declines since the start of 2023 amid concerns about China and the growing possibility of a recession.

Both Brent and WTI benchmarks declined by more than 8 per cent last week, their biggest weekly loss in the first seven days of a new year since 2016.

“The reopening of the Chinese borders has been the biggest driver for today’s price move,” said Sudharsan Sarathy, lead analyst at the London Stock Exchange Group.

“With this, the zero-Covid policy comes to an end effectively and brings up the prospects of … strong travel by Chinese citizens, both domestically and internationally.

“Forecasts suggest a strong airline demand in the Lunar New Year period.”

Expectations of less aggressive US interest rate rises are supporting financial markets while weakening the US dollar.

A weaker dollar makes oil cheaper for holders of other currencies.

The US Dollar Index, a measure of the value of the greenback against a weighted basket of major currencies, was down 0.25 per cent at 103.62 on Monday morning. The index is lower by 1 per cent since January 1.

US non-farm payrolls exceeded expectations slightly, with the addition of 223,000 jobs in December, the Bureau of Labour Statistics (BLS) reported on Friday.

A survey of Bloomberg economists had forecast employers would add 203,000 jobs.

The unemployment rate dipped to a 53-year low of 3.5 per cent, from 3.6 per cent, while wage growth was up 0.3 per cent but still below forecasts of 0.4 per cent.

The slowing wage growth has raised hopes that the US Federal Reserve “might yet achieve a soft landing despite its aggressive rate hiking”, said Edward Bell, senior director of market economics at Emirates NBD.

Last month, the Fed raised its interest rates by 50 basis points, its seventh increase in 2022, to curb inflation, which hit a four-decade high last June.

The US central bank indicated in December that more increases were planned this year.

Inflation in the eurozone, which hit a record high in 2022, fell more than expected in December amid an easing in energy prices.

Consumer prices rose at an annual rate of 9.2 per cent in December, compared with a 10.1 per cent increase the previous month.

“This was slower even than the projected 9.5 per cent and marked the slowest pace of price growth since August as slower growth in energy prices brought down the headline level,” said Mr Bell.

Danish investment bank Saxo Bank expects Brent to trade below $80 a barrel in the first quarter before bouncing back to about $90 on China's recovery and seasonal demand.

“We have strong doubts about the recession risk to the US economy and see demand from some of the world’s largest consumers underpin the price during a year where supply will continue to be managed by the Opec+ and US producers' inability or unwillingness to ramp up production,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Last week, Swiss bank UBS forecast that Brent would trade at $110 a barrel in the middle of 2023 while WTI would average $107 a barrel.

China’s reopening may result in oil demand hitting a “record high” in the second half of this year, the Swiss lender said in a research note.

“Meanwhile, Russian oil production should fall in 2023 due to the European Union's embargo on Russian crude and refined products,” UBS strategists said.

An increase in production outside the Opec+ group of countries is expected to be modest, given years of underinvestment in new oil and gas projects, they said.

Updated: January 09, 2023, 12:22 PM