Oil futures: Crude retreats as economic fears counter geopolitics, China demand

30 Jan 2023

Quantum Commodity Intelligence - Crude oil futures Monday were drifting lower as ongoing recessionary fears extended Friday's losses despite rising geopolitical tensions and increased optimism over China's demand rebound.

Apr23 ICE Brent futures were trading at $85.01/b (1815 GMT), compared to Friday's settle of $86.40/b, while Mar23 was trading at $85.29/b ahead of expiry.

At the same time, Mar23 NYMEX WTI was trading at $78.48/b versus Friday's settle of $79.68/b.

The US Federal Reserve, European Central Bank and Bank of England are all set to raise interest rates again this week, albeit at smaller increments than recent hikes but still dampening sentiment.

"The risk-off cautious mood in the market ahead of the central bank meetings is hurting risk assets, including oil," said City Index analyst Fiona Cincotta.

Prices were up earlier after a series of explosions hit an Iranian weapons factory in the central city of Isfahan over the weekend, in what officials said was a coordinated drone attack and the finger of blame pointing towards Israel.

Iran's state TV also said a fire broke out at an oil refinery in an industrial zone near the northwestern city of Tabriz. The cause of the accident is under investigation, according to the semi-official Fars News Agency.

Markets also remain on edge with Russia escalating military attacks on Ukraine after its neighbour secured pledges for more advanced tanks from European and the US, although there is no timeline on when German-made Leopard 2 and US Abrams tanks could be deployed.

Otherwise, German chancellor Olaf Scholz has ruled out sending fighter jets to Ukraine, while the US said it would discuss the idea of supplying jets "very carefully" with Kyiv.

Meanwhile, a Ukrainian official warned over the weekend that Russia was likely preparing a new offensive, probably timed to coincide with the 24 February anniversary of Moscow's invasion last year.

Secretary of the National Security and Defense Council Oleksiy Danilov told Radio Svoboda, the Russian-language arm of US broadcaster Radio Free Europe/Radio Liberty, that it was "no secret" that Russia's army was preparing its next attempted advances.

Long positions

Prices also found support earlier as money managers extended long Brent crude positions by 20.4 million barrels to 280.2 million barrels as of 24 January, pushing up net long positions to a one-year high of 237.6 million barrels.

"This is the largest net long seen since March last year and the buying appears to reflect the more bullish outlook for the market. The expectation is that the market will tighten as we move through the year due to lower Russian supply and a recovery in Chinese demand," said Warren Patterson, head of ING's commodity research.

China reported a sharp drop in new Covid-related deaths during the Lunar New Year period, despite a boost in travel increasing the likelihood of more infections across the country.

The Chinese Center for Disease Control and Prevention said 6,364 deaths were linked to Covid-19 at hospitals across the country between 20-26 January, almost half the number in the previous week.

China saw 226 million domestic trips during the Lunar New Year holiday, state media reported, a 74% surge from last year after the government lifted all travel curbs under its now-abandoned zero-Covid policy.

However, the figure is still well below pre-pandemic levels, with 421 million domestic trips made over the 2019 holiday period.