Oil prices pull back on lower demand expectations

Oil prices pulled back on Tuesday, with WTI price plummeting to $79.7. If the WTI price declines, it may encounter support near $70.2 per barrel, while resistance may be found near $82.3 per barrel.

The increasing oil demand outlook has been prevalent over the past couple of weeks. China’s economic reopening boosted oil prices to seven-week highs earlier in the week. 

On Tuesday however, global economic concerns pushed oil prices down. Recession risks remain high for some of the world’s biggest economies, putting a lid on oil prices. On Tuesday, US business activity data were disappointing, reducing the oil demand outlook. Expectations of a build-up in US crude oil inventories scheduled to be released on Wednesday also brought oil prices down.

Oil prices are supported by optimism over China’s economic recovery though. China’s economy has suffered from prolonged lockdowns and the country’s debt has ballooned over the past few years. The Chinese government recently eased some of its strident Covid regulations, abandoning its zero-Covid policy. China has re-opened its borders after almost three years, fuelling hopes of economic recovery. Recent data shows a marked increase in air travel and road traffic in China after the restrictions were eased, indicating increased economic activity and oil demand. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand.

In addition, US inflation is cooling, which may give the Federal Reserve some leeway toward scaling back its interest rate increases. US PPI data last week fell below expectations, reducing Fed rate hike expectations and driving oil prices up. PPI declined by 0.5% in December, versus estimates of a 0.1% drop. Headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November. Aggressive rate hikes stifle economic activity fuelling recession fears. As inflation starts to cool though, central banks are starting to lower the pace of rate hikes, raising oil demand expectations.

OPEC released its monthly report last week, raising optimism about the oil demand outlook. The organization left its global oil demand forecast unchanged, boosting oil prices, as markets had been expecting a drop in oil demand outlook.

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Written by:
Myrsini Giannouli

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