- Deepening front-month contango reflects sour near-term outlook
- China faces deluge of Covid deaths during Lunar New Year
According to Bloomberg article published on January 4, 2023, oil’s losses deepened, with thin liquidity exacerbating sharp swings, as China’s mounting death toll overshadowed the country’s resolve to boost its economy.
West Texas Intermediate fell 5.3% to settle below $73, with crude dropping 9.5% in the past two sessions. China’s unwinding of its Covid Zero policy is expected to eventually resuscitate demand in one of the world’s biggest energy importers. However, the explosion in infections has extended the timeline for recovery. Deepening contango in front-month oil spreads reflects the dour near-term view.
“The disconnect between how forward-looking assets like energy equities anticipated a China recovery does not translate to immediate crude strength as there is a lot near-term risk to demand before we see recovery take hold,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Management.
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 compounded the weak 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.
Also weighing on prices, a pre-holiday freeze that hobbled refinery capacity in some parts of the US has lowered crude processing capacity in North America.
“There’s a few more weeks of softness I would think,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said in a Bloomberg TV interview.
