Oil fell on demand concerns from top importer China

WTI crude oil futures witnessed the biggest weekly fall since June 2022, declining almost 10% in the previous week, as subdued China demand and prospects of further economic tightening radically shifted the market’s sentiment. Oil fell on all trading days, except last Tuesday, as investors weighed a potential escalation of the war in Ukraine after an alleged Russian-made missile struck Poland. Later, NATO and Poland’s leaders said there was no indication that a missile that struck Polish territory was from Russia, leading to a further slide in oil prices.  China’s daily covid cases tally crossed 20,000, with enduring outbreaks in key cities testing local authority’s appetite to ease the burden of Covid Zero restrictions while getting infections under control.

WTI and Brent prompt spreads flipped into contango, for the first time since last year amid the Texas pipeline outage and bulls ran for cover. Shell Plc’s 375,000 barrel-a-day oil conduit running from Houston to Port Neches is operating at reduced rates until the second half of December, amid a month-long disruption of a Texas oil pipeline, rippling through the physical market and fuelling fears of a short-term supply glut. Crude arrives at this location from Cushing and is exported to international markets.

China is the world’s largest importer of crude oil and the recent surge in covid cases raises fresh concerns about oil demand as new cities are imposing lockdowns. A city near Beijing that was rumored to be a test case for China dispensing with all virus restrictions went into lockdown for five days, as cases multiply. The only thing that is preventing Beijing’s demand from collapsing is export demand from China. China’s crude oil throughput rose 0.8% in October from a year earlier as the government released a higher fuel export quota in an attempt to help revive the country’s virus-battered economy. There are also reports that several Chinese refiners have asked Saudi Aramco to reduce December-loading crude oil volumes, as Covid restrictions and a faltering economy have weakened fuel demand. Earlier in the month, Beijing announced plans to ease covid restrictions, in a move to prop up the economy, by reducing quarantine days and flight restrictions. However, the recent surge in cases might test the authority’s nerves.

G7 price cap in focus for the week

Crude oil erased all the gains from the OPEC+ production cuts announced in October, as surging covid cases in China and prospects of further monetary tightening from major central banks weigh on the demand outlook. China’s daily Covid infections climbed to near the highest on record, with 27,307 new cases for Monday, just shy of the previous record of 28,973 reached in April when Shanghai’s outbreak sparked a surge in infections. Subdued demand from top oil importer China is a bearish factor for oil prices.

Meanwhile, G7 nations are aiming to announce a price cap on Russian crude oil, as early as Wednesday. The Biden administration is expected to privately share a proposed price ahead of a meeting of European Union ambassadors scheduled for 23rd November. If EU ambassadors back the proposal, an announcement can be expected on the same day. EU ban on Russian seaborne crude exports kicks off on 5th December. The US is trying to prevent a supply outage, by implementing a cap. Russia has already said that it won’t be supplying oil to nations agreeing to a price cap and they could even cut output temporarily

The OPEC+ cartel meets on 4th December, a day before the EU sanctions kick in. After yesterday’s market rout on speculation of an OPEC+ output hike, Saudi Energy Minister Prince Abdulaziz bin Salman denied news of a potential oil output increase and also signaled that they are ready to reduce production further to balance supply and demand if needed.

Investors can brace for high volatility. In the event of any supply cuts from Russia, as retaliation to the G7 price cap, we might see a short-term spike in oil prices. On a positional basis, we recommend buying on dips, as the EU ban on Russian oil, the US price cap mechanism, ending SPR sales and winter demand might prompt a rebound in prices. For the week, MCX Crude oil December futures might trade in the range of Rs.6,200 – 7,150 per bbl, with an upside bias.



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