US supply concerns, China reopening drive Brent futures

Front-month ICE Brent has rebounded by $3.53/bbl in the past day, to $79.34/bbl at 09.00 GMT.

PHOTO: Aerial view of an oil refinery. Getty Images

Upward pressure:

Brent has been supported by the closure of the Keystone Pipeline, raising oil supply concerns in the US. A total of 622,000 b/d of Canadian heavy crude from Alberta, Canada flows through the pipeline to refineries in the US Midwest and Gulf Coast regions. The Canada-based pipeline operator TC Energy has not yet provided a reopening timeline, reports Reuters.

The Bank of America has predicted that Brent will rise above $90/bbl before the end of the year with support from a change in monetary policy tack from the US Federal Reserve, from hawkish to dovish, and from a successful economic reopening in China, according to Reuters. The Bank of America has forecast Brent to average an even higher $100/bbl next year, driven by a further Chinese oil demand recovery and EU sanctions resulting in a 1 million b/d decline in Russian crude production.

The reopening of China through easing of Covid-related restrictions is propping up Brent, as markets take note of optimism over the recovery of Chinese demand.

S&P Global has called China’s Covid policy “the most important fundamental factor for energy markets,” and forecasts China's total energy demand to increase by 3.3 million b/d, “up from virtually no growth in 2022,” in its energy outlook 2023 report.

Amrita Sen, director of research for Energy Aspects, has told CNBC that "China reopening will be very, very bullish for oil markets. Now, again, not expecting that to be overnight, but over the course of next year, this is going to be probably the single biggest driver of oil prices.”

Downward pressure:

The fear that recessions in the US and Europe will hurt demand remains a headwind for crude prices in the near term. Given warnings surrounding a "mild to serious" recession next year, investors are holding the reins tight.

Wells Fargo writes in its 2023 outlook report, “we expect a US recession in the first half of 2023, as well as a continued global economic slowdown, as last year’s hawkish monetary policy and money growth slowdown works with a lag."

Goldman Sachs has predicted last week that the US economy will enter a recession next year, with a 35% chance of a “soft landing”.

By Konica Bhatt

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