DTN Oil

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved lower in early trading Friday, although all petroleum contracts are heading for their biggest weekly gains since October amid hope that a choppy reopening of the Chinese economy following a U-turn on zero-COVID policies will materialize into higher fuel demand next year.

Expectations that Chinese oil demand will expand next year have underpinned an advance by West Texas Intermediate and Brent oil futures of as much as 6% this week, as Beijing officials abandoned nearly all COVID controls in favor of a "let it rip" approach. Anecdotal evidence out of China suggests entire families fell sick last week as the Omicron virus burns through its large cities. There are also indications that hospital capacity in Beijing and Hong Kong is under severe pressure and unable to handle the developing health crisis. Some studies suggest nearly one million people will die in the coming months because of Beijing's sharp policy U-turn. In the immediate term, this will likely be a bumpy reopening for China, now mired with a "stop and go" approach the West faced a year ago when Omicron cases surged before eventually leveling off in the spring. As a result, the first quarter of 2023 could be more underwhelming than the rest of the year due to an expected slowdown in economic activity.

China is the world's second-largest oil consumer, importing on average 10.1 million bpd in the year prior to the outbreak of the COVID-19 pandemic. Analysts estimate that China's demand is lagging somewhere between 700,0000 bpd and 1 million bpd below its pre-pandemic norms.

Underlying Friday's losses in the oil complex are hawkish central banks that sent an unmistakable message this week -- inflation is way too high for any policy pivot even if they step down the rate increases. European Central Bank on Thursday announced a smaller 0.5% increase in its benchmark interest rate but signaled borrowing costs would go "significantly" higher next year to tame inflation.

At a news conference following the announcement, ECB President Christine Lagarde said, "Anybody who thinks this is a pivot for the ECB is wrong. We're not pivoting, we're not wavering, we are showing determination and resilience in continuing a journey where we have ... If you compare with the Fed, we have more ground to cover. We have longer to go."

ECB's rate announcement comes a day after U.S. Federal Reserve raised its federal funds rate 0.5%, in line with market expectations, and a stepdown from the 0.75% rate hikes from the previous four meetings. However, the focus remained with the Federal Open Market Committee's economic projections that showed a rather bleak outlook for the economy next year, with GDP growth expected to expand by just 0.5%, down from their 1.2% growth outlook in September. FOMC expects the national unemployment rate to rise to 4.6% next year compared with a 3.7% jobless rate in November.

What's more hawkish, median projections for the peak federal funds rate is now seen ending 2023 at 5.1%, up from 4.6% in September's projections. The federal funds rate is now in a 4.25% to 4.5% target range, meaning the central bank is projecting to lift the key overnight borrowing rate by another 0.75% over the course of 2023.

Near 7:45 AM ET, January WTI futures declined $1.72 to $74.39 bbl, and February Brent futures on ICE dropped to $79.34 bbl, down $1.89 bbl. NYMEX January RBOB futures fell $0.0323 to $2.1342 gallon and January ULSD futures nosedived $0.0711 to $3.2119 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com