Copy of 2023-02-02T164254Z_833268567_RC2IST9MN2X9_RTRMADP_3_UKRAINE-CRISIS-PRODUCTS-CAP-EU-1675405726753
Crude’s retreat this week has come alongside declines in other leading industrial commodities, with copper and iron ore also lower. Image Credit: REUTERS

Dubai: Oil headed for a second weekly drop as optimism over a recovery in Chinese demand dimmed and US stockpiles kept rising.

West Texas Intermediate fell toward $75 a barrel, set for a loss of about 5 per cent this week. The China reopening trade for commodities has flagged amid questions over the timing and extent of the country’s recovery. In the US, data midweek showed nationwide holdings expanded for a sixth week.

Crude has swung within a $10 range this year, with prices caught between concerns of a global slowdown and expectations of recovering oil demand in China after Beijing ditched its rigid Covid Zero policy. Central banks in the US and Europe raised interest rates this week, and warned that they weren’t yet done with monetary tightening to combat still-too-elevated inflation.

Traders are also looking ahead to the next batch of sanctions on Russian energy flows, which will kick in at the weekend. The European Union is set to impose a ban on seaborne imports of Russian petroleum products, while also starting a price-cap mechanism similar to one in place on crude. The measures are meant to starve Moscow of funds amid the war in Ukraine.

China reopening

Oil’s in “limbo as the market awaits tangible signs of China’s oil demand recovery,” said Vandana Hari, founder of Vanda Insights. “The EU products ban is not seen as a major factor but it still comes with a bit of uncertainty.”

There are uncertainties regarding the pace of China’s reopening, according to RBC Capital Markets, which highlighted what it termed a “sloppy” physical oil market. The world’s largest crude importer “needs to pull harder in order for the physical messiness to clean up,” it said in a note.

“Large US inventory builds this week have weighed on the market, while there is still little clarity on how strong a demand recovery we could see from China,” said Warren Patterson, head of commodities strategy at ING Groep NV. “However, we still hold onto our constructive medium-term outlook for the market with the expectation of a tightening in the oil balance.”