Oil market: is it all about the Chinese lockdowns?

As the stock markets are pausing to wait for the latest news from the US job market (US jobless claims are due today and overall are still likely to indicate that the US job market is fairly healthy) oil prices remain comfortably higher on the week.

Things have been happening on all fronts: Venezuela, OPEC, Russian price cap and the colder weather but the push and pull of China remains the strongest factor affecting the prices.

Protests against strict Covid restrictions in China have been going on over the last few weeks and seem to have brought on a change in public policy with restrictions about to start being loosened. The renewed outbreak of the pandemic this autumn has left scars on the Chinese economy and the manufacturing purchasing managers index has fallen in November to 48, a clear sign of a shrinking manufacturing. The loosening of the rules now in the pipeline is likely to be only light at first, but it has been read by the market as the first step to a further easing in the future and a way of reviving some economic growth.

Also, the weather forecasts in Europe and in Asia are indicating that the mild winter is over and that bitter cold weather is around the corner signalling that the use of diesel and heating oil is likely to increase sharply over the coming weeks.

In the meantime, the European Union has agreed to – rather than fully ban imports of Russian oil – cap oil prices at $60 a barrel, or at a $27/bbl discount to current market prices, in order to limit Russia’s profits from oil exports. It remains to be seen how effective this move will be giving that it is not really restricting the amount of Russian oil reaching European markets.

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Easing of Venezuela sanctions

Elsewhere, after three years of sanctions on Venezuelan crude oil the US is beginning to ease its sanctions and the first tankers with Venezuelan oil should leave local ports before the year end. The sanctions were put in place by President Trump in opposition to the country’s left-wing government led by President Nicolas Maduro.

The amounts expected to be shipped are still relatively low at around 1 million barrels and will only go a short way towards relieving some of the tightness in global markets. The production capacity of the OPEC country has shrunk over the last ten years to 700,000 barrels a day.

Separately, OPEC is due to hold its meeting virtually on 4 December, signalling that a change in the current policy is highly unlikely and that the cartel will most likely just roll over its previous policy. At its last meeting the group agreed to a nominal cut of 2 million barrels a day which meant a real reduction closer to 1 million barrels a day. Barring any major moves in prices the cut is expected to stay in place until 2024.

With all of this happening at once there is likely to be some choppiness in the oil price over the coming days. The Russian oil cap is much higher than the $30/bbl proposed by some members so will only be a slight negative for prices. The OPEC meeting is worth keeping an eye on in case members end up proposing a fresh production cut. The winter weather will start having an effect over the coming weeks, particularly on oil distillates. But news from China will be by far the strongest mover. Strap your seat belts on.

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