Oil Price Rollercoaster: China Reopening, War in Ukraine and U.S. Monetary Policy

Oil prices have been on a rollercoaster in the start of 2022 as traders attempt to price in the impacts of China’s reopening, the supply curbs announced by Moscow amid the war in Ukraine, and persistent concerns that tighter monetary policy may trigger a recession. The Organization of Petroleum Exporting Countries (OPEC) and its allies have been pressing on with cutbacks in output amid concerns around oil supply, according to the UAE’s energy minister.[0]

Yesterday, the US Energy Information Administration (EIA) released its weekly petroleum status report, showing that crude inventories rose by 16.283 million barrels during the week ended Feb. 10. This brought the total commercial crude oil inventories to 471.4 million barrels, which is around 8% above the five year average for this time of year.[1]

Adding to the downward pressure on crude prices was the announcement this week that the United States would sell 26 million barrels of oil from the nation’s strategic reserve, which is already at its lowest level in about four decades.[2] West Texas Intermediate (WTI) dropped toward US$79 a barrel after a volatile session Monday.[0]

The industry-funded American Petroleum Institute (API) reported that US commercial crude inventories expanded by 10.5 million barrels last week, according to people familiar with the figures. Data showed that there was an increase in the supply of gasoline and distillates.[3] WTI dropped below $79 a barrel in early Asian trading after ending more than 1% lower on Tuesday.

The futures and swaps markets are predicting a high point of the Federal funds target rate above 5.20% this year, which is significantly higher than the 4.9% observed two weeks ago.[4] WTI dropped below $79 a barrel in early Asian trading after ending more than 1% lower on Tuesday.

In pre-noon Asian trading today, the cost of crude oil went up, disregarding the EIA’s weekly inventory report that estimated a large stockpile in the USA. This was due to OPEC and the International Energy Agency raising their demand predictions for the year.[5] The IEA upgraded its 2023 demand outlook, and said global crude supply could also potentially tighten due to weak production from OPEC and Russia.[6]

Oil retreated from its earlier increase and stayed within its recently established, restricted area as investors analyzed further proof of augmented energy demand in China and a considerable rise in US crude stockpiles.[7]

0. “Oil declines on U.S. requirement to sell more crude from the SPR” BNN Bloomberg, 14 Feb. 2023, https://www.bnnbloomberg.ca/oil-declines-on-u-s-requirement-to-sell-more-crude-from-the-spr-1.1883387

1. “USOIL Shrugs Off US Stockpile Expansion, Helped by China Optimism” FXCM, 16 Feb. 2023, https://www.fxcm.com/markets/insights/usoi-shrugs-off-us-stockpile-expansion-helped-by-china-optimism/

2. “Oil little changed as market discounts big U.S. crude storage build” CNBC, 15 Feb. 2023, https://www.cnbc.com/2023/02/15/oil-prices-drop-as-us-inventories-jump-fuels-demand-worries.html

3. “Oil Slips as US Supply Build Overshadows Stronger China Outlook” Financial Post, 15 Feb. 2023, https://financialpost.com/pmn/business-pmn/oil-extends-drop-on-large-stockpile-build-and-inflation-concerns

4. “Crude Oil Dips as US Dollar Finds Firmer Footing Ahead of CPI. Where to for WTI?” DailyFX, 13 Feb. 2023, https://www.dailyfx.com/news/crude-oil-dips-as-us-dollar-finds-firmer-footing-ahead-of-cpi-where-to-for-wti-20230213.html

5. “Oil Prices Rise On Upbeat Demand Forecasts” OilPrice.com, 16 Feb. 2023, https://oilprice.com/Energy/Energy-General/Oil-Prices-Rise-On-Upbeat-Demand-Forecasts.html

6. “Oil prices rise as demand hopes offset bumper U.S. inventory build By Investing.com” Investing.com, 16 Feb. 2023, https://www.investing.com/news/commodities-news/oil-prices-rise-as-demand-hopes-offset-bumper-us-inventory-build-3004921

7. “Oil Perks Up as China Demand Signals Reinforce Brighter Outlook” Yahoo! Voices, 16 Feb. 2023, https://www.yahoo.com/now/oil-perks-china-demand-signals-073824033.html