Brent slumps on Chinese Covid-19 cases and recession worries
Front-month ICE Brent has slumped lower by $6.08/bbl on the day, to $80.36/bbl at 09.00 GMT.
PHOTO: Incoming travellers from China, Hong Kong and Macau will require negative Covid-19 tests starting tomorrow in the US and the UK among other nations. Getty Images
Upward pressure:
Energy intelligence company Wood Mackenzie has predicted a “brisk return” to oil demand growth this year. It has forecast demand growth to increase by 2.3 million b/d in 2023, driven by China’s easing of Covid-19 restrictions and rising use of petrochemical feedstocks.
“This resumption of the upward trend in demand is likely to jolt the oil market out of its current doldrums and provide support to prices,” writes Ann-Louise Hittle, head of macro oils at Wood Mackenzie.
According to Morgan Stanley, energy markets will see a "transitional year" in 2023. It has predicted prices to remain between $90-100/bbl, with a potential for further upside "if China achieves a successful reopening from its zero-COVID policy" and demand normalises.
Russian supply disruptions provide key support to Brent, says Andreas Economou, senior research fellow at the Oxford Institute for Energy Studies (OIES). Other tailwinds for Brent include geopolitical tensions outside Russia, an earlier-than-expected normalisation of the Chinese economy and an easing of monetary policy.
The OIES' Economou has forecast a $118/bbl price ceiling for this year if positive factors persist throughout the year.
Downward pressure:
Brent has been in a bind due to concerns about a Covid-19 resurgence in China and restrictions on Chinese travellers. EU nations will meet today to discuss entry requirements for travellers coming from China. In the meantime, incoming travellers from China, Hong Kong and Macau must provide negative Covid-19 tests starting tomorrow in the US, UK, Australia, India, Israel, Japan and Canada.
Investment bank Goldman Sachs projects the global economy will grow by just 1.8% in 2023, as "US' resilience contrasts with Europe's recession and China's bumpy reopening." This is a sobering warning for Brent as slowing growth will undermine oil demand.
The OIES' Economou predicts that in a bearish scenario in which Russia's output is cut by less than 700,000 b/d, Brent could drop to $60/bbl.
In terms of demand, Economou sees a deeper, prolonged global recession, persistently high inflation and a slower Chinese recovery as key downside risks.
On the supply side, there are downside risks from limited Russian supply disruption after the EU embargo on Russian oil product kicks in on 5 February. There are also potential downsides if US shale oil production growth overshoots expectations and if there is a breakthrough in US-Iran nuclear deal negotiations, according to Economou.
By Konica Bhatt
Please get in touch with comments or additional info to news@engine.online
