Oil Weakens on China COVID, Global Recession Concerns

Oil prices edged lower on Wednesday, as concerns over the rise in COVID-19 cases in China following its reopening would curb the recovery of the world’s second-largest economy, while western economies are seen moving into recession, limiting fuel demand growth.

Brent crude futures were down 0.1% to $84.52 per barrel, while the US West Texas Intermediate (WTI) crude futures fell 0.3% to $79.26 per barrel.

Crude prices rose to a three-week high on Tuesday after major oil importer China announced that it would end the quarantine requirement for inbound travelers starting next year.

However, the move, which currently does not have a successful mass vaccination program, has led to more COVID infections, putting hospitals in the country under heavy pressure.

China’s COVID Troubles, Global Recession Weighing on Oil

While the oil market welcomed the news of China’s reopening, any surge in demand may occur later as the country addresses the increase in COVID-19 cases.

Furthermore, many western economies are expected to face recession, which could weigh on demand for energy products, as central banks opted for an aggressive monetary policy tightening to ease significantly high inflation.

Uncertainty around the supply front also remained. The US continued to face a strong winter storm, with oil refiners trying to resume operations at facilities shut down by the extreme cold, icy weather across most of the US.

Russian President Vladimir Putin also said Moscow would ban oil sales from February 1 to countries that follow a price cap implemented this month by the Group of Seven (G7) countries.

Analysts at a Dutch banking group stated that the progress of the Russia-Ukraine war would be vital to oil markets next year. While a de-escalation may not push oil trade flows back to levels before the conflict began, it would significantly reduce supply risk from the market.

The market now awaits the American Petroleum Institute’s US crude inventories report to be released later in the day. US stockpiles are forecast to drop, adding to the 3-million barrel fall in the previous week.