Brent Bounces Off 12-Month Low on China's Reopening Prospects

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced early Thursday as investors balanced concerns over a slowing U.S. economy against prospects of a broader reopening in China that could boost global oil demand next year.

Chinese authorities this week released new guidelines that will govern future COVID-19 outbreaks in a country where a zero-tolerance approach has been deployed for the past three years that has sapped economic growth and demand for oil. The new direction comes just days after widespread protests against harsh lockdowns and government overreach swept across the country. The new measures include -- but are not limited to -- replacing mandatory quarantine requirements at the government facility to isolation at home; limiting high-risk areas to apartment units and blocks instead of entire neighborhood or streets; expanding a vaccination program for the elderly.

The final point that pushes a stronger vaccine mandate is a cornerstone for a successful reopening of China, according to analysts. Regardless of the exact path to reopening, that road will likely be a bumpy one for economic recovery.

November trade data showed just how deep the impact of the rolling lockdowns has been on China's battered economy, with exports and imports falling to nearly 2020 lows in November. Exports fell by 8.7% last month from a year earlier to $296 billion following a 0.3% decline in October, data released by Chinese Customs on Wednesday. Shipments to the U.S. tumbled 25.43% compared to the same period last year, while exports to the European Union fell by 10.62%, year-on-year, customs data showed.

Thursday's move higher also follows inventory report from the U.S. Energy Information Administration showing commercial crude oil inventories declined for the fourth consecutive week through Dec. 2, pressing nationwide stockpiles to 9% below the five-year average. Since mid-November, commercial crude inventories have declined by a hefty 26.9 million barrels (bbl) amid gradual slowdown of a yearlong program of oil sales from Strategic Petroleum Reserves, while refiners reduce stock levels ahead of ad valorem taxes on inventory held at year's end in Texas and Louisiana.

On the bearish side, stockpiles of gasoline and distillate fuel rose by 11.5 million bbl last week as demand for refined fuel struggles into the final weeks of the year.

Distillate fuel supplied to the U.S. market -- a measure of demand -- remained firmly below 4 million barrels per day (bpd) for the fourth straight week through Dec. 2. It must be noted that distillate consumption correlates closely with economic activity, particularly in energy-intensive industries. Although the service sector of the U.S. economy strengthened in November, manufacturing activity posted its first contraction since May 2020, led by a sharp decline in new orders and production capacities.

"The U.S. manufacturing sector fell to its lowest level since the coronavirus pandemic recovery began," said Timothy R. Fiore, CPSM, C.P.M., chair of the Institute for Supply Management. "November composite index reading reflects companies' preparation for the lower output in the future."

Near 7:30 a.m. EST, January West Texas Intermediate futures surged $1.78 to $73.80 bbl from the lowest settlement in nearly 12 months of $72.10. February Brent futures on ICE advanced $0.94 to $78.10 bbl. January RBOB futures gained to a $2.0981 gallon, and the January ULSD contract advanced $0.0237 from a more-than 10-month low settlement of $2.7805 gallon.

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

Liubov Georges