DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange advanced more than 3% early Monday in reaction to reports mainland China opened its borders with a special administrative region of Hong Kong after almost three years of restricted travel and mandatory quarantine, ending the last pillar of zero-COVID policy ahead of the travel rush for the Lunar New Year holiday.

China's Spring Festival that takes place over the course of 40 days and culminates in a Lunar New Year on Jan. 21 is expected to see a travel surge of about 2.095 billion passengers, according to estimates from China's Ministry of Transport. The passenger volume by air, rail and road would be up by 99.5% from 2022 levels but still some 30% below the pre-pandemic record set in 2019.

The estimate is based on early bookings made by Chinese and international travelers despite the ongoing surge of COVID-19 infections. The annual Spring festival travel will surely help infections spread far and wide.

China Eastern Airlines said on Saturday it plans to allocate 753 aircraft for the upcoming travel rush, with average planned daily flights of more than 2,900, and the planned passenger seat kilometers returning to 87% of the pre-epidemic level in 2019. Air China also plans to arrange 58,633 flights over the next few weeks, an increase of 75.9%, year-on-year, with a significant growth in domestic routes. These data points bode well for the consumption of jet fuel, diesel and gasoline in Asia's region that have been depressed by an estimated 1 million barrels per day (bpd) on the back of China's zero-COVID policies. For context, the number of passengers carried by road in 2022 was down 82%, air by 63%, and rail by 52% compared with before the pandemic. Should estimates for this year's travel rush be realized, the so-called J-curve for China's oil demand -- lower consumption and prices in the first quarter but higher in the second half of the year -- might be pulled forward.

Domestically, last week's economic data which included better-than-expected employment report and the Institute of Supply Management's services PMI that unexpectedly fell into contraction at the end of 2022 raised hopes that the Federal Reserve won't need to raise interest rates so aggressively this year. December employment report showed the labor market is still growing at a rapid clip however, adding an average of 229,000 new jobs over the final three months of the year, even as wages have come down significantly from November levels. Over the past 12 months, average hourly earnings have increased by 4.6%, moving closer to a 3.5% target established by the Federal Reserve as sustainable for stable inflation. The jobless rate unexpectedly fell 0.2% from the previous month to 3.5% -- matching the 50-year low seen just before the outbreak of COVID-19 pandemic in early 2020.

Meanwhile, U.S. services industry activity contracted for the first time since May 2020 amid weakening demand and easing of prices paid by businesses, offering more evidence that inflation is abating.

Outside the COVID-19 pandemic slump, this was the weakest services PMI reading since late 2009. In a way, the combination of slower wage growth and faltering demand for services is what the Federal Reserve is looking for to slow the pace of interest rate increases this year. The Fed has tried for nearly a year to create slack in the labor market by raising the federal funds rate from zero at the start of 2022 to the current range of 4.25% to 4.5%. The concern in the market is that the Fed's aggressive monetary tightening in such a short period of time will not only have a cooling effect on the labor market but also tip the economy into recession. A retiring Chicago Federal Reserve President Charles Evans told the Wall Street Journal that the latest data gives him hope that the central bank could slow the path of interest rates to a more traditional 0.25% increments as soon as next meeting on Jan. 31-Feb. 1.

Near 7:45 a.m. EST, West Texas Intermediate for February delivery rallied $2.72 to $76.48 barrel (bbl), and Brent March futures on ICE advanced $2.61 to $81.19 bbl. NYMEX RBOB February contract spiked $0.0857 to $2.3303 gallon, and front-month ULSD futures rallied $0.0969 to $3.1014 gallon.

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