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WTI falls further below $77.00 as China's Covid crisis stalls the rebound

Alina Haynes

Jan 04, 2023 15:01

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West Texas Intermediate (WTI) futures on the New York Mercantile Exchange (NYMEX) have experienced a straight decline after testing the previous week's high at $81, accompanied by minimal buying demand. As investors fret over China's sluggish economic recovery, the oil price has plummeted to a level close to $77.00 and is likely to continue falling.

 

The market anticipates a sluggish recovery in China's economic operations following a surge of Covid-19 cases caused by the administration's rapid reopening efforts. The Covid situation is becoming increasingly precarious as medical authorities lose control over the management of sick patients.

 

According to historical evidence, the reopening of an economy results in pent-up demand for commodities, which accelerates inflationary pressures dramatically. Analysts at Danske Bank opine, "A Chinese rebound will have a favorable influence on the global economy, but its effect on commodity prices would be inflationary."

 

In the meantime, the oil price was not supported by Caixin Manufacturing PMI data that exceeded expectations. IHS Markit provided economic statistics of 49.0, which is greater than the consensus estimate of 48.8 but less than the previous release of 49.4.

 

The US Dollar Index (DXY) is able to hold above the crucial support level of 104.00. The oil price is likely to remain on edge until the Federal Open Market Committee (FOMC) minutes are released. Despite the fact that the bulk of inflation indicators indicate lower demand and indications that inflation has peaked, the labor market is exceptionally tight and the inflation rate is still much above the objective of 2%. The FOMC minutes will provide the forecast for monetary policy in CY2023.

 

More policy tightening by the Federal Reserve (Fed) could raise the possibility of recession, which is susceptible to oil demand and could have a big impact on oil prices.


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