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Crude oil continues to climb on China reopening optimism, U.S. CPI

Published 01/12/2023, 08:55 AM
Updated 01/12/2023, 08:56 AM
© Reuters.

By Peter Nurse -- Oil prices rose Thursday, climbing for the sixth consecutive session on optimism over China’s demand growth as well as U.S. consumer inflation data pointing to a slower increase in interest rates.

By 09:00 ET (14:00 GMT), U.S. crude futures traded 2.1% higher at $79.00 a barrel, while the Brent contract rose 1.9% to $84.23 a barrel. 

China, the world's biggest oil importer and second-largest consumer, has opened its international borders for the first time in three years, bidding farewell to its zero-COVID policy which has severely curbed the country’s economic activity.

Anecdotal reports suggest a record-breaking week for travel ahead of the Lunar New Year holiday. This will be the first year since 2019 that China’s 1.4 billion-strong population will have been able to travel freely during the busiest holiday of the year.

“Optimism around Chinese demand…appears to have provided some upside to the market,” said analysts at ING, in a note. “A number of signs, including an increase in crude oil import quotas, suggest a recovery in Chinese oil demand this year. Although the big uncertainty remains just how big a recovery we will actually see.”

Helping the optimism was the news that the headline rate of inflation in the U.S. fell to its lowest since late 2021 in December, encouraging hopes that the Federal Reserve will soon be able to stop raising interest rates.

The consumer price index fell 0.1% from November, bringing the annual change to 6.5%, down from 7.1% the previous month. The monthly drop in the index was below analysts' forecasts for no change, but the annual rate was in line with consensus. 

Further gains look likely as the year progresses, with Morgan Stanley expecting the oil market to tighten during the third and fourth quarters of 2023.

“We see the oil market coming into balance in 2Q and turning tight in 3Q and 4Q, supporting higher prices later this year," the bank said, in a note, adding that current uncertainties like China's re-opening, recovery in aviation, risks to Russian supply, slowdown in U.S. shale and the end to SPR releases will turn “tailwinds."

Morgan Stanley sees Brent prices range bound around $80-85 per barrel in the first quarter, before reaching $110 a barrel by the end of the year.

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