Oil Down On China Concerns But Analysts Remain Bullish On 2022

They also note that concerns about omicron impact are fading fast: File Image/Pixabay

Thanks to a stronger U.S. dollar and concern over Covid outbreaks in China, traders on Monday caused oil to fall for a second straight session – however, Brent is still firmly in backwardation, a sure indicator of a bullish market.

West Texas Intermediate fell 67 cents to settle at $78.23 per barrel, while Brent declined 88 cents to $80.87 per barrel.

Resumption of oil production in Libya and Kazakhstan added to the downward pressure, and Ed Moya, senior market analyst for the Americas at Oanda, noted  that "the market got unnerved by the Covid situation in China, which could weaken short-term demand outlook for the world."

Recent lockdowns in China are due to that country's zero-tolerance approach to the pandemic, and on Monday it was reported that a mass testing initiative is underway in the northern port city of Tianjin.

In addition, ING analysts Warren Patterson and Wenyu Yao pointed out that "We are also approaching the Chinese New Year, a time when there is normally plenty of domestic travel, and so any domestic restrictions will weigh on oil consumption."

Still, there is no concrete evidence of demand impact that would compromise crude's strong start in the New Year, plus Brent's prompt spread was 60 cents per barrel in backwardation on Monday, up from 41 cents just a week ago.

Jeffrey Halley, senior market analyst at Oanda, said, "The backwardation of the oil futures curve has started widening once again, implying that prompt demand is robust."

In fact, Francisco Blanch, global commodities head at Bank of America, forecast $100 oil in Q2 2022 on Monday, and said demand is "recovering quite meaningfully."

He added that with the Organization of the Petroleum Exporting Countries (OPEC) levelling off its input within months along with that of Russia, "it will be a tight 2022."

Similarly inclined OCBC Treasury Research analysts wrote in a note, "The oil market's bullish narrative remains intact on the back of fading omicron concerns and a tightening global stock situation; we remain bullish on crude oil in the short to medium term."