Oil set to end the week higher on China recovery hopes and stronger US economic growth

Traders work on the floor of the New York Stock Exchange. AFP

Oil prices traded higher on Friday and were on track to end the week with a slight gain amid hopes of a swift fuel demand recovery in China and stronger-than-expected economic growth in the US.

Brent, the benchmark for two thirds of the world’s oil, was 1.07 per cent higher at $88.41 a barrel at 8.50pm UAE time.

West Texas Intermediate, the gauge that tracks US crude, was up 1.27 per cent at $82.04 a barrel.

Brent settled 1.57 per cent higher at $87.47 on Thursday, while WTI was closed up 1.07 per cent at $81.01.

The US economy slowed slightly in the final quarter of 2022, although it still grew at a faster-than-expected pace amid fears that the world's largest economy is heading towards a recession this year.

The nation's gross domestic product grew at a 2.9 per cent rate from October to December, a report from the Bureau of Economic Analysis showed. This marks two consecutive quarters of economic growth, after 3.2 per cent growth in the previous quarter.

Overall growth for 2022 was 2.1 per cent, according to the analysis, down from 5.9 per cent in 2021.

Oil futures have gained for two straight weeks after China — the world’s second-largest economy and top crude importer — reopened its borders for the first time in three years, triggering a sharp increase in airline bookings.

The market has “underpriced” China's recovery, according to Japanese bank MUFG.

“China is a dominant driver of commodities demand — consuming anything from about 10 [per cent] to 15 per cent of global [oil and gas] demand,” said Ehsan Khoman, head of research — commodities, ESG and emerging markets at MUFG.

“As such, China’s reopening matters profoundly for commodities balances as well as market pricing. Yet, with China’s activity levels past their trough and mobility rapidly normalising, this does not tally up with the broad commodity positioning.”

Investors will be closely watching a meeting of Opec delegates next week, as an EU embargo on Russian crude products comes into effect on February 5.

While Russia has been able to redirect crude barrels to China and India following the December sanctions, it will be “more challenging” for the energy exporter to divert refined products to other markets, said UBS, which expects oil prices to rise to $100 a barrel over the coming months.

“Russia may try to export more crude, but there’s a limit in terms of how much additional crude barrels China and India can take, in our view,” the Swiss lender said in a research note.

Russian oil exports declined by 200,000 barrels per day in December after an EU crude embargo and a G7 price cap on the country’s crude shipments came into effect, according to the International Energy Agency.

At the same time, Russian diesel exports surged to a multiyear high of 1.2 million bpd, of which 720,000 bpd was destined for the EU, the IEA said.

The market for diesel, a major industrial fuel, has been tight due to Ukraine war and low global inventories after the pandemic.

High natural gas prices supported increased switching activity from gas to other fuels, especially diesel and heating oil.

Europe, which still gets more than a quarter of its diesel from Russia, has been boosting imports of US diesel and petroleum, but that still might not be enough to “plug the gap” in the short term, Karen Kostanian, oil and gas analyst at Bank of America (BofA) Global Research, told The National during a media round-table on Thursday.

China, which is lifting restrictions on diesel exports, could plug 30 per cent to 50 per cent of Europe’s deficit, said Mr Kostanian.

“We don't know where Europe is going to be taking the diesel [from] because there is a general diesel deficit globally … in our opinion the [products ban] will be much tougher than the crude ban.”

Meanwhile, European natural gas prices have tumbled over the last few months due to an unusually warm winter.

Dutch Title Transfer Facility gas futures, the benchmark European contract, has fallen by about 60 per cent in the last three months.

While prices have come off last year’s highs, natural gas is still 220 per cent to 230 per cent above pre-Covid averages, the Institute of International Finance (IIF) said in a report.

“The huge spike in gas prices last summer has therefore distorted market perception, making it seem like recent declines took Europe back to ‘normal’. They did not,” said the IIF.

“Some of the drop in gas prices — besides warm weather — reflects big changes in demand, with manufacturing output in energy-intensive sectors substantially below prewar levels.”