Oil: Not going down

27 Jan, 2023

Having lost nearly 10 percent in two trading sessions at the start of the year, the bear run did not last beyond that. And expectedly too, as highlighted in this space earlier, due to stronger demand signals emerging from China and a continuation of a tight supply market in the foreseeable future. Brent benchmark price in the international market has risen 5 percent month-to-date, with a 15 percent upside from the low of $77/bbl.

Reports from the ground suggest China’s economy is opening up faster showing signs of strong demand recovery, particularly from the jet fuel side. The doom and gloom over the global growth outlook seem to be playing second fiddle to the reopening of the Chinese economy, as 2Q 2023 demand from the Asian superpower is expected to be the highest for any quarter since the start of pandemic. Recall that Beijing’s borders have been opened fully for the first time in three years, and observers expect a significant increase in economic activity as a result.

On the supply front, the upcoming Opec Plus meeting start of February holds significance. Most market observers expect the cartel to stick with its earlier reduced output call. There were jitters earlier as US crude inventory rose to over a million barrels unexpectedly. Experts have attributed the rise to the historic cold snap in the US earlier in the month, disrupting the supply chain. Normalcy is expected to have returned to the fuel supply chain across much of the USA.

The upcoming embargo on Russian refined products to Europe via sea route also plays in favor of oil bulls. Curtailments in Russian oil production cannot be ruled out, which could be outside the ambit of the Opec Plus combined decision. The EU ban on refined Russian oil products comes into effect in February, and Russia could respond with further production cuts in the short run unless the demand growth from China or India makes up for the potential loss.

From all that is out there, there are no evident reasons for oil prices to slide from current levels. For the likes of Pakistan, this spells more trouble, especially after the recent round of currency depreciation. Another round of energy inflation awaits consumers in Pakistan – and this time it could be tougher than ever before.

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