Oil prices settle at highest level in three weeks on hopes of rising demand from China

Demand for crude is expected to increase as China's economic activity recovers from Covid restrictions

A Shell petrol station in Wuhan, China. Global oil demand is expected to hit record levels this year, driven by China’s economic recovery. Getty

Oil prices increased at the end of trading on Friday, reversing earlier losses to post their best closing marks in three weeks on hopes that demand from the world's top importer, China, will improve further.

Brent, the benchmark for two thirds of the world’s oil, added $1.08, or 1.3 per cent, to settle at $85.83 a barrel, while West Texas Intermediate, the gauge that tracks US crude, rose $1.52, or 1.9 per cent, to end at $79.68 a barrel.

Both benchmarks, which lost about $2 in early trade, recorded their highest closes since February 13.

Compared with last week's close, Brent added $3.01, or 3.63 per cent, while WTI surged by $3.36, or 4.4 per cent.

Oil demand is expected to increase after China, the world's second-biggest economy, eased Covid restrictions, which curtailed domestic economic activity.

The move has revived consumer demand, with the Caixin purchasing managers' index (PMI) showing a reading of 55.0 in February, from 52.9 in January, which was a second straight monthly increase.

The PMI's 50 mark separates contraction and expansion in activity.

But China posted a 0.9 per cent slide in 2022 oil imports to 508.28 million tonnes, or about 10.17 million barrels per day, the country's General Administration of Customs reported in January.

That was a second consecutive year of declines, despite Beijing increasing purchases in the fourth quarter.

The effect of the pandemic "remains far-reaching", Wang Zhe, a senior economist at Caixin Insight Group, wrote in the PMI report.

"Currently, the foundation for economic recovery is not yet solid, and it will take time to fully restore production and social order to normal," he said.

"The central government said restoring and expanding consumption should be prioritised. Income and expectation are the basis of consumption.

"In the coming period, relevant policies should focus more on increasing household income and improving market expectations.”

The International Energy Agency expects global oil demand to surge to record levels this year, driven by China’s economic recovery.

Demand is projected to rise by two million barrels per day to 101.9 million bpd this year, the Paris-based agency said in its February oil market report. It previously forecast a growth of 1.9 million bpd.

However, a rise in US crude stockpiles offset the optimism in China. Inventories in the world's biggest economy — an indicator of fuel demand — rose by 1.2 million barrels last week, while petroleum stocks decreased by 900,000 barrels, the US Energy Information Administration (EIA) said.

“Our forecast for global consumption of petroleum depends on uncertain economic conditions — especially in China,” EIA administrator Joe DeCarolis said previously.

“How China’s economy changes following its reopening from pandemic lockdowns could have a significant impact on global consumption of petroleum products.”

Oil prices have dropped by about a third since they peaked a year ago when Russia began its invasion of Ukraine. Year-to-date, both benchmarks have posted marginal gains, with Brent almost flat.