Oil's Rally Quashed By Strong Dollar As Market Uncertainty Persists

Analysts continue to debate how 2023 will treat the commodity: File Image/Pixabay
 

A strong U.S. dollar was blamed for oil prices on Wednesday falling from a three-week high, although crude is still set for a modest gain in 2022 – and analysts maintained that the New Year could be bullish depending on one factor: China.

West Texas Intermediate fell 0.7 percent to settle at $78.96 per barrel, and Brent slipped 1.3 percent to $83.26 per barrel.

Craig Erlam, senior market analyst at Oanda, said, "We have seen a strong rebound over the last few weeks and that's being pared a little today but the narrative remains unchanged.

"Next year brings immense uncertainty and plenty of potential upside risk for prices from the China reopening to lower Russian output and further OPEC+ cuts," and he added that China's success in abandoning its Covid-zero infection policy could drive recovery in 2023 - but that it will take time to understand the implications on demand.

Rebecca Babin, a senior energy trader at CIBC Private Wealth Management, told Bloomberg Television that China's reopening could be huge for oil: "It could swing demand by 1 million to 1.5 million when it happens; however, how it happens remains to be determined."

Babin noted that the way the reopening is happening right now is "disorderly," has led to some countries prohibiting flights into their country from China for health security reasons, and could lead to other countries imposing travel bans – as well as a drop off in demand before the needle swings back.

As for Wednesday's trading behaviour, Giovanni Staunovo, analyst at UBS, said,  "My sense is the general risk-off mood has weighed on the oil prices, in a market with thin liquidity."

Wednesday also saw analysis of Russia's response to the G-7 cap on its oil prices, which bars supplies of its crude and fuels to foreign buyers that adhere to the threshold in their contracts.

Alexander Isakov, Russia and CEE economist for Bloomberg Economics, said the response, scheduled to begin on Feb. 1, "will be largely symbolic" amid the former Soviet Union's dependence on petrodollars to fund imports and keep inflation under control.

Isakov added that if Russia cuts its own output, then the break even oil price could be pushed to $95-$100 per barrel this year compared with oil in the $60s last year, which would make Russia's fiscal system "that much more fragile."