Crude oil: What’s next after China inspired jump? Crude oil: What’s next after China inspired jump? Crude oil: What’s next after China inspired jump?

Crude oil: What’s next after China inspired jump?

Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil trades near a three-month high around $120 per barrel following China's latest, and so far, succesful attempt to lift Covid-19 lockdowns in major cities. The near-term outlook points to higher prices with tight supply caused by sanctions, OPEC's inability to lift production, and oil majors showing limited appetite for new projects. Developments that eventually will balance the market as higher prices kills demand while adding fuel to recessionary flames across the world, perhaps even in the US.


Crude oil trades near a three-month high with the front month contracts of WTI and Brent both hovering around $120 per barrel, waiting for the next market moving developments. The recent upside extension was driven by China’s latest, and so far, successful, attempt to reopen major cities following Covid-19 lockdowns, a development which is likely to increase demand from the world’s biggest importer at a time where the global supply chains remain stretched due to the war in Ukraine.

However, against a challenging supply outlook the demand side is also receiving increased attention. The outlook for global growth remains challenged with a high frequency US GDP tracker monitored by the Federal Reserve pointing towards increased risk of zero growth in the second half, potentially resulting in a technical recession following the negative Q1 print.

In addition, the World Bank on Tuesday slashed global growth, warning of 1970’s-style stagflation. With supply being challenged by sanctions against Russia - the EIA forecasts output could take an 18% hit in 2023 - reduced investment appetite from the oil majors, and OPEC+ struggling to deliver the agreed production hikes, only a reduction in global demand, potentially driven by demand destruction at even higher prices will balance the market.

Crude oil priced in dollars is still around 20% below its 2008 all-time high, while in local currency, oil is at a record high for countries accounting for more than a third of the world’s oil demand according to this Bloomberg Opinion piece. With the cost of diesel and gasoline already at record levels in dollars, the impact on non-dollar-based consumers has become even more expensive.

The above charts show the margin, priced in dollars per barrel, refineries can make from producing gasoline and diesel from either WTI in the US or Brent in Europe. With the gasoline margin trading at a factor 3 to 4 above the long-term average, consumers are already paying prices that reflect crude at or even above $150. However, two years of lockdowns has not only given people's savings a boost, it has also increased the desire for mobility this upcoming summer holiday period. With that in mind, and together with increased demand for cooling in the Middle East, demand for fuel is likely to remain strong during the coming months, thereby further aggravating an already tight market outlook.

Later today, the EIA will release its weekly crude and fuel stock report, and even the prospect for an across-the-board stock build, if API’s data is confirmed, the market has still managed to trade higher ahead of the release.

WTI crude oil recorded the second highest closing price since 2008 on Tuesday, and as long it can maintain support around $116.50 per barrel, the risk of higher prices exist.

Source: Saxo Group

The main reason why the report is unlikely to offer much relief to a tight fuel market can be seen below with inventories of gasoline and distillate (diesel) at their lowest seasonal level in years. In addition, the market will also look for any change in demand for motor gasoline, currently at levels close to the five-year average.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.