Oil posts biggest weekly gain in 4 months on Russia output cut and China demand prospects

Crude prices are heading for a strong finish this week after two consecutive weeks of declines

Pump jacks at an oilfield in Russia, which will cut crude production by 500,000 barrels per day in March. Bloomberg

Oil prices climbed on Friday, posting their biggest gain in four months, as traders evaluated the prospects of further tightening of the market amid a gradual rebound in China’s crude demand and Russia’s plans to cut oil production.

Brent, the benchmark for two thirds of the world’s oil, was 2.24 per cent higher at $86.39 a barrel at the close of trading on Friday. West Texas Intermediate, the gauge that tracks US crude, closed up 2.13 per cent at $79.72 a barrel.

Brent recorded a weekly gain of 8.1 per cent, while WTI added 8.6 per cent.

Crude prices fell the previous week for the second time on the trot, dragged down by concerns about a continued rise in interest rates, following a strong US jobs report.

On Friday, Russia, the world’s second-largest oil producer after Saudi Arabia, said it would cut oil production by 500,000 barrels per day, or about 5 per cent of its crude output, in March after the West imposed price caps on Russian crude and oil products.

“As of today, we are fully selling the entire volume of oil produced. However, as stated earlier, we will not sell oil to those who directly or indirectly adhere to the principles of the 'price cap',” Deputy Prime Minister Alexander Novak said in a statement carried by news agency Tass.

“In this regard, Russia will voluntarily reduce production by 500,000 barrels per day in March. This will contribute to the restoration of market relations”.

On February 4, the G7, the EU and Australia reached an agreement on price caps for Russian petroleum products as part of an international push to limit Russian President Vladimir Putin's war chest for his military offensive on Ukraine.

The EU imposed an embargo on Russian crude oil coming in by sea in December and, together with its G7 partners, set a cap of $60 a barrel for exports around the world.

“Lower Russian production, together with China's reopening, should tighten the oil market further over the coming quarters,” UBS strategist Giovanni Staunovo said.

“We reiterate our positive price outlook and advise risk-taking investors to add long exposure … or to sell Brent’s downside price risks.”

Optimism over China’s reopening had pushed oil prices close to $90 a barrel last month. However, rising economic uncertainty and concerns about weakening demand have since weighed on futures.

China is slowly opening up its economy and rolling back Covid-19 restrictions that slowed the growth of the world’s second-largest economy and the world’s top crude importer.

China's consumer price index in January also rose from the previous month as the country’s inflation rate approaches the government’s target of 3 per cent, which was set last year.

“Oil is heading for a strong week of gains, wiping out last week's losses, as analysts continue to be encouraged by China's transition to living with Covid,” said Craig Erlam, senior market analyst for the UK and Europe, the Middle East and Africa at Oanda.

“While the buzzword for large parts of the global economy this year is ‘resilience’, when it comes to China, it's more a question of just how strongly it will bounce back.”

The market was expecting a pick-up in growth in the second half of this year on China’s reopening, helped by the easing of Covid restrictions and fiscal and monetary measures.

“[However,] now it would appear those expectations are being brought forward, which should stimulate demand for oil and other commodities,” said Mr Erlam.

Brent prices have remained range-bound since the November sell-off as markets have been caught between “still soft prompt fundamentals and a brightening macro outlook”, oil analysts at Goldman Sachs said in a report on Thursday.

“This choppy price action masks that time spreads have actually strengthened on a pick-up in China oil demand while back-end prices have softened because of producer hedging and, possibly, a market reassessment of the long-term hit to Russian supply,” they said.

Goldman Sachs has lowered its Brent price estimate this year by $5 a barrel and expects it to rise gradually to $100 a barrel by December, a level it expects the price to stay in 2024.

Despite oil being range-bound in recent months, “a stronger Chinese recovery could well strongly test those upper limits”, Mr Erlam said.