On Wednesday, the U.S Energy Information Administration reported an increase in crude inventories by 2.42 million barrels, close to the market expectations of 2.46 millions barrels. This is the third consecutive crude inventory build, coming after an outsized 4.14 million last week. This makes it a rough 4% above the 5-year average for this time of the year.
While a build in U.S. inventories indicates a drop in demand and is normally bearish for oil prices, WTI has climbed continuously to $78.6 from Monday, while Brent hit $81. Tailwinds include a weakening outlook on the U.S. dollar, as well as an accelerating rebound from China.
For one, inflation seems to be cooling, something the Fed has conceded recently in response to the ongoing hike cycle. For the dollar-denominated oil, this is good news as interest rates – and thus the greenback – begin to slow. However, this is all contingent on whether the Fed sees whether inflation is on track to drop to its target 2%, something whose progress was slowed recently by pressure from shockingly good employment data.
Currently, a surer driver of oil prices seems to be China. More specifically, it is China’s rapid reopening and eventual rebound. The Paris-based International Energy Agency expects China’s oil consumption to make up half of 2023’s global oil demand growth, with increased demand coming from travel and industrial activity.
Fitch Ratings has recently upgraded its growth forecast for China’s economy from 4.1% to 5% in 2023, a revision based on “evidence that consumption and activity are recovering faster than initially anticipated”, with macro readings like its Manufacturing PMI coming above expectations.
Further cementing this is a surprise price hike from Saudi Arabia, signaling that the world’s largest oil exporter foresees more-than-healthy demand coming from Asia. According to Bloomberg, both Goldman Sachs and Morgan Stanley have forecast Brent climbing to over $100 per barrel in Q3 as China fully reopens its economy.
Investors are now advised to look out for January’s CPI, which will be released on Thursday, 14 Feb at 15:30 (GMT+2). The CPI is one of the key inflation readings, and will give an indication of future U.S. dollar movement – which also directly moves oil prices.
As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.