Enthusiasm For China Lockdown Easements Elusive As Oil Prices Remain Mixed

But some analysts see a full demand recovery next year: File Image/Pixabay

Despite the enthusiasm from oil traders in recent sessions about the potential for China easing its Covid restrictions and thus improving demand, oil prices on Thursday remained largely unchanged following news that the cities of Guangzhou and Chongqing announced an easing of curbs.

Brent settled 9 cents lower at $86.88 per barrel, and West Texas Intermediate settled up 67 cents at $81.22 per barrel.

Eli Tesfaye, senior market strategist at RJO Futures, said, "We came into the session bullish but we're not going to get to $100 no matter what city reopens," and he added that he expects oil to trade in the $70-$90 per barrel range and gradually stabilize after higher volatility in recent weeks.

The sentiment was largely in line with comments of the previous session, in which Ed Moya, senior market analyst at Oanda Corp., said, "If China's Covid rules are slowly eased and OPEC stays the course, crude prices could rally another 5-10 percent here."

For its part, JPMorgan predicted Brent will average $90 per barrel in 2023, and Morgan Stanley expected the return of much higher prices mid-year after China ends its lockdowns.

The latter's analysts wrote, "Our balances point to modest oversupply in coming months, hence we see Brent prices range-bound in the mid-80s to high-90s first; however, the market will likely return to balance in 2Q23 and undersupply in 2H23.

"With limited supply buffer, we expect Brent to return to $110/bbl by the middle of next year."

Matt Smith, lead oil analyst at Kpler, pointed out that China will continue to influence trading in the near future: "Oil markets are going to continue to be buffeted by ongoing news out of China, given how much of an impact ongoing lockdowns are having on oil demand in the world's second-largest consumer."

Also on Thursday, the European Union governments tentatively agreed on a $60 cap on Russian sea-borne oil, according to an EU diplomat; this helped support prices, but previously it was argued that if the price was set lower (the original cap range was between $65 and $70 per barrel, far above Russian production costs of only $20 per barrel), it could inflame the global energy crisis, particularly if Russia decides to cut production by more than expected.

As for the meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies on Dec. 4, much has been made of the meeting being virtual (signalling no change on output policy); but some analysts warned that with the current oversupply in the market, the cartel risks a collapse in the oil price if it doesn't further curb its output targets.

Stephen Brennock, analyst at PVM, said, "A further cut in production cannot… be ruled out: failure to do so risks sparking another selling frenzy."