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China economic numbers boost oil’s bull case

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Crude oil prices continue to advance at the beginning of the new week, led by Brent crude, which rose by 0.6% today and reached its highest level since the beginning of last November, exceeding the level of $85 per barrel. West Texas Intermediate crude also rose by 0.1% after a negative opening and reached $81.04.

The oil market has received support from the Chinese economy overnight, with a faster-than-expected acceleration of industrial production announced for February, the highest in three years, in addition to signs of optimism about the future with greater than expected growth in fixed asset investments.

Why is China starting to drive the oil price?

Industrial production is the heart of the Chinese economy and therefore contributes significantly to pushing oil prices higher if its growth accelerates to meet the demand of factories that are extremely hungry for fuel.

Industrial production in China recorded an unexpected growth of 7% compared to expectations for a slowdown from 6.8% to 5.3% last February on an annual basis, and today’s reading represents the fastest pace of growth since June of 2021. Since the beginning of the year, Chinese industry output has grown by 7% on an annual basis as well.

Inflamed tensions around the world are pushing up the price of oil. Brent Crude rose towards $86 a barrel, as traders assessed the deepening conflict in Gaza, with Israel’s Prime Minister Benjamin Netanyahu vowing to stay on track with the plan to push into Rahaf, which is set to dash hopes that a truce with Hamas may be struck.

Ukraine has also increased attacks on Russian oil refineries at the weekend, with the last drone strike causing a fire at the Syzran refinery. This is part of a military strategy to seek out weaknesses in ‘Russia’s war machine’ just as Putin cements his control of Russia in his landslide election victory, where no credible opposition candidates were allowed to stand.

On the demand side, the International Energy Agency has said short term demand for energy is likely to be boosted by increased demands for fuel from shipping companies having to re-route vessels away from the Red Sea.


US oil inventories are down

“I believe that oil prices are currently enjoying positive pressure, especially after data confirmed a decrease in U.S. crude oil inventories by 1.5 million barrels last week, and following Ukraine’s drone attacks on major Russian oil refineries causing damage to around 12% of their oil processing capacity,” said Rania Gule, a market analyst with XS.com. “The U.S. crude oil barrel tested the $80 level. Short positions near $80 may be liquidated due to escalating tensions. Still, I doubt that crude oil prices will sustainably rise above this level, especially when geopolitical tensions fade from the headlines. Additionally, there is strong resistance within the $80/82 per barrel range in the short to medium term.”

Fund managers are also sounding positive, not just on oil prices, but also the prospects of the energy sector. Steve Palmer, recent Armchair Trader podcast guest and CEO of AlphaNorth Asset Management in Canada, said last week his holdings in the energy sector performed well during February.

“We expect to add to our energy weighting going forward,” Palmer said. “This is somewhat of a contrarian call. Despite the headwinds of government policies and negative media for traditional energy companies, we believe that the supply/demand metrics for both oil and natural gas are favourable. These commodities will take decades to be phased out by the use of renewable energy sources. Strong energy prices have been a large factor contributing to inflation. The lack of investment by the energy sector compared to historical norms will continue to support strong prices in the foreseeable future.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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