Crude rally runs out of steam as China adheres to zero-Covid policy

Front-month ICE Brent has inched $0.45/bbl lower on the day, to $97.60/bbl 09.00 GMT.

PHOTO: EU sanctions on Russian crude imports will enter into force from 5 December, followed by refined petroleum products on 5 February next year. Getty Images

Upward pressure:

Crude values have been supported as only a few weeks are left before the EU sanctions on Russian crude oil imports enter into force. “The near-term oil fundamentals remain bullish amid tight supply," ANZ commodities strategist Daniel Hynes says. He thinks that EU sanctions on Russian oil could tighten crude inventories across Europe.  

According to a Bloomberg report, Russian seaborne crude oil exports have spiked to a five-month high as Russia ramps up exports before the sanction deadline. The country exported 3.6 million b/d in October, the highest level since June. Major export destinations have been China and India, followed by Turkey.

S&P Global estimates that Russia’s East Siberia Pacific Ocean (ESPO) crude traded at an average discount of $6.7/bbl to Dubai Brent in October, nearly halved from $12.9/bbl in September.

Despite a surge in Covid-19 cases in China, the crude market has started to price in the prospect of a loosening of China’s rigid zero-Covid policy from early next year, says Saxo Bank. It thinks that the market has an upside potential between $6-15/bbl, which is in line with Goldman Sachs’ projection.

Last month, Goldman Sachs raised its 2022 price forecast for Brent from $99/bbl to $104/bbl, and to around $115/bbl in the first quarter of next year.        

Downward pressure:

New Covid-19 cases increased in Guangzhou and other cities in China. The country’s health department has reiterated that it will continue to take measures to curb rising Covid-19 cases and adhere to the zero-Covid policy.

China’s reopening optimism pushed Brent values higher last Friday. Some of these gains have been eroded since. Chinese oil demand remains weak, but showed some signs of recovery last month. The country's crude imports rose by 0.6 million b/d from September to 10.16 million b/d in October - a five-month high, according to data from China's general administration of customs.

According to a Reuters analyst poll, US crude oil inventories increased by about 1.1 million bbls last week. Official Energy Information Administration figures are set to come out tomorrow.

By Nithin Chandran

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