- China demand supportive to crude in pre-holiday trade while COVID fear beckons
- Charts show WTI could retest last week’s $77 peak but could also drop to $65
- US housing and consumer confidence are the only major US data for the week
Demand recovery fueled by China’s economic reopening is giving oil a prop just as fears grow that COVID-19 fatalities could spike in the world’s top importer.
Thinner U.S. trading going into the Christmas holiday and as markets wind down for the year could also lead to price swings.
Crude markets rose in Monday’s Asian trading, extending last week’s rebound after the prior week’s biggest slump since March.
Brent crude for delivery in February was at $79.8 by 05:20 ET (10:20 GMT), up 77 cents, or 0.97%. Brent rose 4% last week and 11% the week prior, the most for a week since March.
U.S. West Texas Intermediate crude for delivery in February was at $75.17 per barrel, up 88 cents, or 1.15%. Like Brent, the U.S. crude benchmark also settled up 4% last week after an 11% drop the prior week.
A sustained move above $73 will keep WTI’s chances valid for a further retest of the $77 level, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. Referring to the Simple Moving Average, he said:
“A strong consolidation above $78 will help extend gains to the psychological handle of $80 and the 100-Week SMA of $82.”
Still, he cautioned that a break and consolidation below $73 will prompt a retest of WTI’s $70 support base.
“If this support base is decisively broken, it exposes WTI to major correctional target-cum-support at the 200-Week SMA of $65.10.”
In the week leading up to the Christmas holidays, the economic calendar is quieting down, with the Bank of Japan being the last of the major central banks to hold a meeting for the year.
The only major U.S. data scheduled for the week were on housing starts, new home sales and existing home sales, as well as on consumer confidence, that could give insights into the economy as recession fears grow.
Those longs were betting on demand recovery related to China’s emergence from lockdowns and other coronavirus-related curbs.
The Biden administration’s plan to begin refilling the heavily drawn-down US Strategic Petroleum Reserve, or SPR, with an initial installment of 3 million barrels from February also provided some support to crude prices. But traders said they were also eager to know when more SPR purchases would be coming through since the reserve was at 38-year lows or 40% below where it was two years ago.
China’s abrupt end to its ‘dynamic zero’ COVID policy is breathing new life into its ailing aviation sector, with average jet fuel demand jumping by 75%, or nearly 170,000 barrels per day, in two weeks, according to satellite data firm Kayrros.
News outlet Caixin reported that China plans to increase flights to restore the country’s average daily passenger flight volumes to 70% of 2019 levels by Jan. 6.
Beijing also pledged to focus on stabilizing its $17-trillion economy in 2023 and step up policy adjustments to ensure key targets are met, the country’s top leaders and policymakers met at a closed-door two-day meeting for charting the economy’s course next year.
Analysts from Haitong Futures said in comments carried by Reuters:
“The market will focus on the progress of demand resumption in China...the general outlook is positive, but the path of recovery could be slow and bumpy given the difficult COVID situation in the near term.”
With the relaxing of China’s health rules, experts worry that up to 60% of the population could eventually be infected with the virus, and a January peak could hit vulnerable people such as the elderly and those with pre-existing conditions.
They say key concerns include China’s large pool of susceptible individuals, the use of less effective vaccines, and low vaccine coverage among those 80 and older, who are at the greatest risk of severe disease.
“If COVID spreads freely and many people cannot get care, we estimate that in the coming months, 1.5 million Chinese people will die from the virus,” The Economist said.
China’s oil demand also could suffer in such circumstances, analysts say. “People’s will to go out may still be conservative in the next one or two months as most cities have yet to see big outbreaks,” Zhang Xiao, at OilChem, said in comments carried by Bloomberg.
He added that gasoline usage might actually drop near term as people opt to stay home to avoid infection or to recover:
“The market will wait at least till March to see a recovery in gasoline demand.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.