Oil’s new year slump deepens below $75 as China concerns grow

Oil’s rough start to the year worsened as a deteriorating demand outlook came to the fore, buttressed by China’s near-term struggles with COVID-19, milder winter weather and US refinery disruption.

West Texas Intermediate fell as much as 3.5 percent to below $75 a barrel after posting a 4.2 percent drop on Tuesday, the most since November. Brent, the global benchmark, slid below $80 on Wednesday.

A rising death toll in China following the swift easing of virus curbs is overwhelming crematoriums, and there are warnings of more casualties heading into the Lunar New Year.

Above-average temperatures in the US and Europe, meanwhile, are easing fears of an energy crunch. Crude’s dwindling levels of open interest have left it open to sharp swings in recent months, and a failed attempt to break above its 50-day moving average this week has done little to improve the technical picture.

While sanctions against Moscow over Russia’s war in Ukraine dragged its oil flows to 2022 lows late last month, that’s been of little relief to bulls so far this year.

The impact of a pre-Christmas freeze that hobbled refinery capacity in some parts of the US should also become clearer in inventory data this week, with the industry-funded American Petroleum Institute’s figures due later.

In the short-term, that has lowered crude processing capacity in North America and is also weighing on prices.

“We’ve seen these big freezeoffs in the US and that has meant that the crude balance has actually weakened,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said in a Bloomberg TV interview, referring to US refinery closures due to cold weather. “There’s a few more weeks of softness I would think.”

Warnings that a US recession is on the cards and China’s surging virus cases continue to cloud the demand outlook, but in the longer term China’s reopening should prove more bullish for markets, Sen said.

“People are underestimating China’s reopening and the multiplier effect on demand,” she said. “Bad news for inflation, but it is definitely something to watch out for.”

Meanwhile, Iraq’s oil revenues in 2022 exceeded $115 billion, according to preliminary figures announced by the oil ministry on Tuesday - a four-year high following a collapse in prices during the coronavirus pandemic.

Oil production accounts for some 90 percent of Baghdad’s income, and the country is the second largest producer within the

Organization of the Petroleum Exporting Countries (OPEC).

“The total revenue from the export of crude oil for the year 2022 amounts to more than $115 billion,” Minister for Oil Hayan Abdel-Ghani said in a statement.

The country exported more than 1.2 billion barrels in 2022, averaging 3.3 million barrels per day, according to the statement.

These revenues follow a spike in prices following Russia’s invasion of Ukraine in February 2022, and OPEC producers’ subsequent reluctance to increase production.

In October, the oil cartel decided to cut production quotas to maintain price levels, with a reduction of “two million barrels per day.”

With a near total reliance on oil revenue to fund state spending, Iraq was hit by a collapse in prices at the beginning of the coronavirus pandemic.

From $78.5 billion in 2019, oil revenues fell to $42 billion in 2020, according to official statistics. By 2021 they had risen back up to $75.6 billion.