Crude Oil Testing Multi-Week Resistance on Positive Chinese Outlook

Crude oil prices climbed to new one-week highs last week, aided by the Chinese economic stimulus story. Despite a weak set of GDP numbers and a slowing economy, China is one of the world’s largest growth engines and its rebound story is providing the octane for oil prices.

A reversal of the country’s zero-covid policy has fueled speculation that the Chinese economy could reopen. However, the latest data has been disappointing, with industrial production down and retail sales down. The good news is that supply chain disruptions are gradually easing. As a result, oil demand could take the next steps towards normalization.

OPEC is expected to need more oil in the coming years, and the OPEC+ alliance is poised to help balance the market. On Wednesday, the group will release its monthly supply and demand outlook. It is also slated to hold its next meeting in the next few weeks.

With the Fed set to raise rates by 25 basis points on Wednesday, money market participants have a 92% chance of a rate hike by the end of December. While the dollar stayed near multi-week highs, a slowing US economy is unlikely to drive demand for commodities priced in greenbacks. Instead, recession fears will likely limit the upside of oil prices.

Other notable statistics include the fact that the smallest distillate inventory increase in seven years happened in the past week. Gasoline inventories fell by 3.8 million barrels. That may not be as exciting as it sounds, but the numbers are impressive.

On a related note, the crack spread has increased to a level not seen in a while. This is a measure of the difference between the price of crude and the cost of gasoline. Increasing the crack spread is a good way to encourage refiners to restock.

Other notable economic data includes a series of regional reports that will detail the output of manufacturing facilities in the U.S. and other regions. In the European Union, the purchasing managers’ indexes of the four largest members sank. However, Germany’s improved economic sentiment helped boost the euro.

Other noteworthy metrics included the rise in airline seat capacity for Northeast Asia. During the past week, the number of seats increased by 10.2%. And, as the Chinese Lunar New Year approaches, jet fuel consumption is projected to surge. These trends point to a cyclical upturn in the demand for energy.

Despite the economic ups and downs, there are still reasons to believe that OPEC’s output policy will help keep the oil market balanced in the coming years. Moreover, the Chinese economic recovery is a positive for the broader global economy. But, with China’s GDP growing at its slowest rate since 1997, the outlook for oil demand may be cloudy. Whether or not this will translate to higher prices remains to be seen.

Ultimately, oil markets are taking the recent plunge in stride. However, the Chinese economic rebound may give the reversal of the zero-Covid policy a run for its money this week.