Oil Prices Rise, China's Optimism Grows Ahead of Lunar New Year

Oil Prices Rise, China's Optimism Grows Ahead of Lunar New Year

Oil prices rose on Friday, and will end the week higher as optimism over China's demand recovery this year largely offsets concerns that a slowdown in the global economy will hurt crude markets.

Markets are expecting a strong boost to China's economy from the week-long Lunar New Year holiday, especially after the country relaxed nearly all anti-COVID restrictions earlier this month.

China kept its main lending rate at a five-month low Friday, indicating that the government plans to keep liquidity conditions loose to spur economic recovery.

Both the Organization of the Petroleum Exporting Countries and the International Energy Agency predict that China's economic recovery will spur demand for crude to a record high in 2023 - an idea that has been a key driver of oil prices in recent weeks.

Brent oil prices were up 0.3% at $86.53 per barrel, and WTI was up 0.6% at $81.08 per barrel at 0923 WIB. Both contracts are up for two straight sessions, and are set to gain up to 1.7% this week.

The oil market largely shrugged off data showing an even bigger increase in US supply over the last week. However, despite the large increase in supply, the unexpected fall in the supply of distillate implies that freight and transport demand remains strong in the world's largest economy.

US supply will also be constrained as the Biden administration stops removing crude oil from the Strategic Petroleum Reserve/SPR. The government has also signaled that they will start replenishing those reserves from February, which can be considered a buy signal for the market.

But on the other hand, fears of a slowdown in economic growth increased following a series of weak US economic data this week. The slowdown in industrial production in particular has created uncertainty over demand for crude oil which will remain stable in 2023.

Markets are also unsure about the direction of US monetary policy, following comments from several members of the Federal Reserve this week. Although most members of the Fed have pushed for a smaller pace of rate hikes in the coming months, they offer differing views on when US interest rates will peak.

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