Oil Rebounds On China Restriction Relaxation As Analyst Predicts Less Market Volatility

Prices also increased on Washington's vow to refill SPR if oil declines below $80: File Image/Pixabay

The seesaw behaviour of oil trading resulted in the commodity on Wednesday bouncing back from the previous session's losses due to one city in China easing its Covid restrictions (thus easing fears of demand erosion) – with one analyst suggesting this is the beginning of a more stable series of gains for crude.

West Texas Intermediate settled at $88.48 per barrel (a gain of $1.17) and Brent settled up 93 cents at $94.10 per barrel after it was announced that the Chinese city of Chengdu would ease its lockdowns gradually.

It's unclear whether the relaxation of restrictions would affect the International Energy Agency's latest prognostication of Chinese oil demand declining by 420,000 barrels per day (bpd) this year in the first annual drop since 1990.

The agency stated, "For now, a deteriorating economic environment and recurring Covid lockdowns in China continue to weigh on market sentiment."

The IEA also forecast that world oil consumption will increase by 2 million bpd this year - about 110,000 per day less than previously forecast - to average 99.7 million bpd, and that it expects widespread switching from gas to oil for heating purposes, double the level of a year ago.

Also, on Wednesday and with unmistakable irony, U.S. president Joe Biden recently stating he would consider refilling the Strategic Petroleum Reserve if prices fell below $80 per barrel was said to have added fuel to the session's trading comeback.

While the return to affordable oil is something the Organization of the Petroleum Exporting Countries (OPEC) would likely rally against by increasing output, for those worried about dwindling supplies a replenishment of the SPA can't happen soon enough: according to the Energy Information Administration, crude inventories at government storage caverns declined by 8.4 million the week ending September 9, the largest release in data going back to 1982.

At 434 million barrels, the reserves are the lowest since 1984.

Analysts on Wednesday seemed to be aligned in their opinion about the state of the oil market moving forward: Rob Thummel, a portfolio manager at Tortoise Capital Advisors, remarked, "I think we see a bounce back for the rest of the year: we continue to see the potential for an under supplied oil market going into the fall and winter."

Phil Flynn, senior market analyst at Price Futures Group Inc., added that "Once we wind down the clock on the Strategic Petroleum Reserve release, we're going to see substantial drawdowns in inventories so that's keeping oil high."