A 10 percent drop in Brent oil price in two days got people excited, with the usual calls of “oil soon to hit $50/bbl” taking over. Little denying that such a dip is a rare occurrence, especially since the Russia-Ukraine war. Prices have since recovered 4 percent in less than two trading sessions, but fears of a bear run have returned, with the focus back on China.
What has caused the jitters in what is otherwise believed to be a tight market, with firm control on supply dynamics by the Opec Plus members? News flow from China is what seems to be doing the trick once again, as the World Health Organization renewed concerns about the new Covid variant spreading in China, accusing the country of underreporting Covid related deaths.
What the Russian price cap could not do to oil prices, the fear of slowdown from China seems to have done. Only actual data emerging from China in terms of factory production, mobility, and high-frequency consumption statistics, tell a different story. China seems to be reopening faster than expected earlier having lifted most restrictions.
The production cuts continue to be firmly in place by Opec members and Russia – with December numbers showing output lower than planned curtailment. The cartel’s next meeting is widely anticipated to result in fresh production caps, especially as the EU’s ban on refined petroleum products from Russia will go into effect from February.
The rising tensions between China and Taiwan should also increase the risk and oil experts are seeing it with keen interest. The US oil inventory drawings have been on a steady rise, whereas the rig count remains moderate. The market may well be in the balance right now, but the cards are still with Russia and Opec allies. The commitment so far from Opec Plus has been unwavering. Given how Saudi Arabia intends to realign geopolitically, an extended bear run in oil price seems highly unlikely.
Saudi Arabia has long maintained that the global oil market and the infrastructure remains heavily underinvested, and any significant decline in prices will inevitably be met with an equal response in terms of supply cuts. Russian oil revenues will stay largely intact should demand from China (and India) continue to rebound. Pakistan, meanwhile, will continue to watch it from the fence, hoping for a respite, the chances of which are slim in 2023.
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