Oil prices volatile on supply vs demand battle

Oil prices were volatile on Wednesday, as higher supply battled with an increased demand outlook. WTI price traded sideways, oscillating around the $76.9 per barrel level. If the WTI price declines, it may encounter support near $73.6 per barrel, while resistance may be found near $79.5 per barrel.

Expectations of increased oil demand outlook in China boosted oil prices Wednesday. Chinese manufacturing PMI data exceeded expectations on Wednesday, expanding at the fastest rate since 2012. Moreover, China’s factory activity rose in February for the first time in seven months, raising hopes for China’s economic recovery. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. The Chinese government has eased some of its strident Covid regulations, abandoning its zero-Covid policy, fuelling hopes of economic recovery. 

Oil prices are also supported by concerns that Russia will cut its oil exports more than previously announced. G7 leaders set a price cap on Russian oil exports on February 5th. Russia has announced plans to reduce oil output by 500,000 barrels per day as a retaliation for the price cap on the country's oil exports. Recent reports indicate that Russia may cut oil production even further, boosting oil prices.

On the other hand, U.S. crude inventories rose by 1.2 million barrels last week to a total of 480.2 million barrels. Even though market expectations were even higher, predicting a 1.7 million barrels raise, increased supply kept oil prices down. Moreover, the US sold an additional 26 million barrels of crude from its Strategic Petroleum Reserve on Tuesday in an attempt to offset the rise in oil prices.

In addition, recession concerns still run high, and aggressive rate hikes stifle economic activity, putting a lid on oil price gains. The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%. US inflation data last week showed that price pressures in the US remain high and are not easing at the pace anticipated.

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Written by:
Myrsini Giannouli

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