Oil heads for second weekly advance as China demand outlook brightens

OIL headed for a second weekly gain as optimism over stronger Chinese demand overshadowed a weaker outlook in other major economies.

West Texas Intermediate rose toward $81 a barrel, putting the US benchmark on course for a gain of about 1 percent this week. Chinese consumption has been picking up after the top crude importer abandoned harsh virus restrictions, with signs of increased buying by refiners in the physical market.

Still, weakness elsewhere has limited the rally. European Central Bank President Christine Lagarde vowed policy would remain tight as inflation was still too high. In the US, Federal Reserve Vice Chair Lael Brainard, considered a dove, said Thursday that rates will need to stay elevated for a period.

Crude has been whipsawed in the first three weeks of the new year as investors took stock of the market’s opposing forces, as well as the outlook for Russian flows into 2023 as sanctions are tightened amid the war in Ukraine. Against that backdrop, there are widely divergent outlooks from banks on where crude is headed, with Goldman Sachs Group Inc. arguing Brent could top $100 a barrel, while Jpmorgan Chase & Co. is much more cautious.

“Prices gained as China optimism continued to reign,” said Charu Chanana, market strategist at Saxo Capital Markets Pte in Singapore. “Reports that China’s Covid caseload has peaked further boosted optimism that demand will start to recover more sustainably.”

Trading activity in crude markets has been picking up after liquidity dwindled last year, exacerbating prices swings. Holdings of global benchmark Brent have climbed to their biggest since March as futures trading volumes grew, and open interest in US benchmark WTI has also gained.

In the coming weeks, traders will be looking for any impact on Russian refined-product shipments caused by a price cap and European Union ban on imports that start on Feb. 5. The moves follow a similar Us-led measure on crude shipments introduced last year. Some European countries are pushing for the crude cap to be lowered, but the Biden administration is resisting.