Oil prices saw a slight increase on Monday following a weekend escalation in hostilities between Russia and Ukraine. However, this upward movement was tempered by ongoing concerns regarding fuel demand in China, which is the world’s second-largest oil consumer, as well as forecasts predicting a global oil surplus.
As of 05:02 GMT, Brent crude futures rose by 29 cents, or 0.4 percent, reaching $71.33 a barrel. Meanwhile, U.S. West Texas Intermediate crude futures climbed by 18 cents, or 0.3 percent, to $67.20 a barrel. Over the weekend, Russia launched its most significant airstrike on Ukraine in nearly three months, inflicting substantial damage on Ukraine’s electrical infrastructure.
U.S. policy shift
In a notable shift in U.S. policy regarding the Ukraine-Russia conflict, President Joe Biden’s administration has permitted Ukraine to utilize American-made weapons to conduct strikes deep within Russian territory, according to two U.S. officials and a source acquainted with the decision. The Kremlin has yet to respond, but it has previously indicated that any loosening of restrictions on Ukraine’s use of U.S. weaponry would be viewed as a significant escalation.
Analyst insights on Russian oil exports
Saul Kavonic, an energy analyst at MST Marquee, noted that there has been minimal impact on Russian oil exports thus far, but he suggested that if Ukraine were to target additional oil infrastructure, it could lead to higher oil market prices. In Russia, at least three refineries have had to either suspend operations or reduce output due to significant losses compounded by export restrictions, increasing crude prices, and elevated borrowing costs, as reported by five industry sources.
Recent market trends
Last week, both Brent and WTI experienced declines exceeding 3 percent due to disappointing data from China, alongside forecasts from the International Energy Agency that predicted global oil supply would surpass demand by over 1 million barrels per day by 2025, even if OPEC+ cuts remain in effect. Data released on Friday revealed that China’s refinery throughput fell by 4.6 percent in October compared to the previous year, coinciding with a slowdown in factory output growth.
Read more: Oil prices set for weekly loss on slow Chinese demand, higher supply prospects
Investor sentiment and rig count
Investor anxiety is also prevalent regarding the pace and extent of interest rate reductions by the U.S. Federal Reserve, which has contributed to uncertainty in global financial markets. In the U.S., the number of active oil rigs decreased by one to 478 last week, marking the lowest level since the week ending July 19, according to Baker Hughes data.
Economic recovery and oil prices
On Friday, oil prices declined as China’s ongoing economic recovery showed signs of weakness, impacting demand from the world’s largest crude importer. The anticipated increase in supplies from the U.S. and OPEC+, combined with skepticism surrounding China’s economic rebound, continues to influence oil prices this week. Brent oil futures for January delivery fell by 1.06 percent, closing at $71.79 per barrel, while West Texas Intermediate (WTI) dropped by 1.02 percent, ending at $68 per barrel, as of 6:06 GMT. For the week, Brent is projected to decline by over 2.7 percent, while WTI is expected to decrease by more than 3.3 percent.
Ongoing demand concerns in China
Concerns about demand in China remain prominent. Although oil prices have stabilized around the $71.00 mark this week, a lack of supportive factors indicates that a price recovery will be slow in the near term. In October, China’s oil refiners processed 4.6 percent less crude compared to the previous year, marking the seventh consecutive month of decline. This downturn is attributed to the closure of several plants and reduced operating rates among smaller independent refiners, as reported by the National Bureau of Statistics on Friday.
Factory growth and market fundamentals
The decrease in refining rates aligns with a slowdown in factory output growth in China last month, and persistent demand concerns in the property sector show little sign of improvement, despite a rise in consumer spending, according to government data. Major forecasters have also indicated that market fundamentals remain weak, contributing to the drop in oil prices this week.
Future supply and demand projections
Looking ahead, the International Energy Agency predicts that global oil supply will outstrip demand by 2025, even with OPEC+ production cuts in place. This forecast is driven by increasing output from the U.S. and other non-member producers, which is expected to exceed the anticipated weaker demand. Last week, U.S. crude inventories rose by 2.1 million barrels, as reported by the Energy Information Administration (EIA) on Thursday, reflecting a much quicker increase than the market had anticipated. Conversely, gasoline stocks fell by 4.4 million barrels, reaching their lowest level since November 2022, while distillate inventories, which include diesel and heating oil, also experienced an unexpected drop of 1.4 million barrels.
