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Why the 7-month oil recession could be about to reverse |

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Oil prices have started the new year on the right foot, falling to heavy losses in the first week before staging a lukewarm recovery in the second, as demand uncertainty continues to weigh on trade. Concerns about the rapid expansion of COVID cases in China, after the relaxation of strict zero-COVID policies have continued to weigh heavily on oil prices.

Fortunately, relief could be on the way as oil markets have reacted positively to China reopens its borders on February 8, 2023 as one of the final acts of abandonment of the zero-Covid era. More relief is expected to come thanks to Lunar New Year travel providing a boost to demand in the near term. The Chinese Lunar New Year lasts for two weeks and is scheduled to begin on Sunday, January 22, 2023, and end on February 5, the date of the full “Snow Moon” rising. In fact, the Civil Aviation Administration of China (CAAC) has forecast that passenger flights could reach 88% of their pre-pandemic levels by the end of January. However, this could only be a temporary blip unless China can get over its latest wave of COVID before oil markets feel confident about the prospects for a sustained increase in demand. But some experts are still holding out hope that the worst may be in the rear view mirror. Commodity analysts at Standard Chartered have expressed optimism that the prolonged sell-off may have reached a tipping point, with analysts saying the seven-month downtrend is now likely to falter. Analysts say earlier hyperbole that triggered a big oil price rally has cooled and been replaced by excessive pessimism leading to oil prices missing their 2023 target.

Related: Oil Prices Steady As Chinese Demand Offsets Huge Crude Buildup

StanChart targets the oil futures markets, where ‘“…speculative positioning now reflecting an overly bearish view in our view and with crude oil the least popular positive exposure among investors other than palladium, we believe there is now USD 5-10/bbl bullish, with more to follow in H2. With supply risks skewed towards lower supply, and with OPEC’s patience probably strained by further attempts to boost prices significantly below.”

Commodity experts have forecast demand growth in 2023 to be 1.04 million barrels per day (mb/d), with non-OECD countries supplying all but 9,000 barrels per day (kb). /d) of that. Demand is expected to be stronger in the second half of the year, with second half demand at 101.1 mb/d, 1.7 mb/d above the first half average. Analysts say much of that growth will come from the Asia-Pacific region, where they have forecast growth to accelerate from 177 kb/d in 2022 to 852 kb/d in 2023, with China seeing demand growth. of 483kb/d compared to a decrease of 350kb/d in 2022.

Divided oil market

Right now, we could say that the oil market is split almost evenly between bulls and bears.

Hedge fund manager Pierre Andurand is tremendously bullish, and he recently went out and predicted that Oil may top $140/bbl this year if Asian economies fully reopen after COVID-related lockdowns. According to Andurand, the market is “underestimating the magnitude of the increase in demand [a full reopen] will bring,” and also told Bloomberg that oil demand could grow by more than 4 million barrels per day, or ~4%, this year. Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners LP, told him to the Financial Post that oil prices return to $100 a barrel in 2023 while Bank of America has forecast that Brent could go quickly from $90 a barrel on the back of a dovish turnaround at the US Federal Reserve and a “successful” economic reopening by China.

But there are also bears.

Two weeks ago, Credit Suisse broke the hearts of bulls by declaring that the the sale is not overt, and Brent could see a further drop towards the 61.8% retracement to $63.02 a barrel. Interestingly, Brent prices have dropped another 4% since that dire prediction of trading at $80.75 a barrel was made, implying that downside risk remains huge. A week ago, famous oil broker PVM oil wrote in a blog that, “There is no doubt that the prevailing trend is down, it is a bear market,citing the hot weather in Europe, as well as China’s coronavirus problems. Another ominous sign: a week ago, Brent futures prices eased into an uptrend, suggesting that traders believe future oil prices will be lower than current prices.

Meanwhile, ING strategists see a weak first quarter but stronger prices from the second quarter onwards. blogging last week that, “The oil market appears to be better supplied in the near term and risks are likely to be on the downside. However, our balance of oil begins to show a tightening in the market from the second quarter to the end of the year, which suggests that we should see stronger prices from 2Q23 onwards”.

By Alex Kimani for

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