Oil extends decline on US recession concern, inventory build

Oil fell for a second day on signs of rising US inventories and economic growth concerns.

West Texas Intermediate dropped below $79 a barrel after declining almost 1 percent on Wednesday as US retail sales slowed, stoking fears of a potential slowdown.

The American Petroleum Institute reported a 7.6 million-barrel gain in commercial stockpiles, according to people familiar with the data, reflecting the lingering impact of a December cold snap which shut down refineries.

Thursday also marks the first day of a series of strikes in France, including at the nation’s refineries. While the first walkout will only last 24 hours, industrial action late last year shuttered much of the country’s crude processing, damping European demand and boosting fuel prices.

Crude has endured a bumpy start to the year, collapsing by 10 percent in the first two sessions only to rebound as China’s reopening dominated the trading narrative.

The big swing-factor for the market is the demand outlook, with industrialized economies looking for a soft landing as interest rates rise and China emerges from COVID-19 curbs.

“There is still a huge amount of uncertainty surrounding the global economy,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. “Maybe the time was ripe for a bout of profit-taking, and the disappointing set of US economic data was the trigger-point.”

In physical markets, China’s Unipec has been snapping up cargoes of Upper Zakum oil from the United

Arab Emirates, purchasing the equivalent of 9 million barrels. The world’s biggest oil company is confident demand will pick up strongly this year as China reopens its economy and the aviation market recovers.

“We are very optimistic in terms of demand coming back to the market,” Saudi Aramco’s chief executive officer, Amin Nasser, said in an interview. “We are starting to see good signs coming out of China. Hopefully, in the next couple of months, we’ll see more of a pickup in the economy there.”

Demand for jet fuel is now around 1 million barrels a day below pre-pandemic levels, according to Nasser, roughly half the figure from a year ago. “It’s picking up, he said at the World Economic Forum in Davos.”

Oil prices whipsawed in 2022. Brent crude surged to almost $130 a barrel in the wake of Russia’s attack on Ukraine, but slumped in recent months as the Chinese, US and European economies slowed. It’s trading at about $86.80 a barrel, up 1 percent since the end of December.

Many Wall Street banks, including Goldman Sachs Group Inc., expect it to climb above $100 a barrel in the second half of the year. They cite a global economic rebound by that time, low fuel stockpiles in nations such as the US and the potential for Russian exports to drop as the west tightens sanctions.

Nasser reiterated that companies need to invest more in oil production. Idle capacity stands at 2 million barrels a day, barely above total demand of 100 million barrels, and will probably drop as China ends its coronavirus lockdowns, he said.

The world needs 4 million to 6 million barrels a day of new production just to make up for the natural decline in existing fields, according to the CEO.

“We’re moving into the situation where we’re eroding spare capacity and any supply interruptions will have a huge impact,” he said.

“We will be in a situation similar to natural gas,” he said, referring to how prices for the fuel jumped to the equivalent of $250 a barrel after Russia’s invasion.

The Saudi Arabian state-controlled company sees oil demand continuing to grow for the rest of the decade, even as electric vehicles become more popular and investors pour money into renewable energy.

“It’s offsetting some of the demand for oil,” said the CEO. Still, crude consumption will “definitely be higher in 2030.”

The increasing use of petrochemicals feedstocks for everything from plastics to fertilizers and clothes is positive for Aramco, he said.

The company wants to convert 4 million barrels a day of crude into petrochemicals by the end of the decade. It’s looking at more investments in Chinese refineries and liquid-to-chemical plants as part of that push, said Nasser.