China Policy Shift Rumours Cause Oil Price Surge, But Demand Fears Linger

Interest rate hikes are still driving demand fears: File Image/Pixabay

Although at this early stage it was little more than talk and could well amount to nothing, rumours that China might be open to relaxing its zero-Covid infection policy – which has wreaked havoc with the country's economy – caused oil prices on Friday to leap upward.

West Texas Intermediate advanced $4.44 to settle at $92.61 per barrel, while Brent gained $3.90 to $98.57 per barrel; the gains were attributed to China is said to be working on plans to scrap a system that penalizes airlines for bringing virus cases into the country – which pundits assume means the world's biggest crude importer is ready to rethink its strategy in handling the virus.

China's lockdowns have caused demand in 2022 to fall by 400,000 barrels per day (bpd), according to Bank of China International Ltd.

As usual, analysts turned on a dime in expressing their near-term outlook for the commodity, with Ed Moya, senior market analyst at Oanda Corp., stating, "There are too many geopolitical risks on the table - that should keep oil's trajectory higher; if the dollar continues to slide here, oil's strength could be relentless."

Just 24 hours earlier, when hand-wringing over demand caused a decline in oil prices, Moya said, "Oil is battling both a weakening global economic outlook and a surging dollar…it seems these bearish drivers won't be easing up anytime soon."

Although China's change of heart is entirely theoretical (a former Chinese disease control official who wished to remain anonymous disclosed the possible policy shift), Dennis Kissler, senior vice president at Bok Financial Securities, said, "With China's easing some COVID restrictions especially for air travel most traders are taking the news as a positive pull to demand in the near future."

Still, oil's Friday gains were said to be pared by the U.S. interest rate hikes, and the U.S. Labor Department's non-farm payrolls report on Friday showed a rise in the unemployment rate to 3.7 percent last month from 3.5 percent in September, supporting demand fears.

John Kilduff, founding partner at Again Capital, remarked, "the various Fed representatives have been making it clear there's a long way to go with respect to interest rate hikes, and oil markets are more sensitive to that."

More bearish sentiment came in the form of The Bank of England warning that it thinks Britain has entered a recession and the economy might not grow for another two years.

Likely trading influences moving into next week include the U.S. Energy Information Administration's short-term energy outlook and the November U.S. Consumer Price Index; further on, the European Union ban on Russian crude imports will take effect on Dec. 5, but details of a G7 price cap are still under discussion.