Oil Prices Are Rising Again as China Recovers and OPEC Meets - Barron's

Photograph by David McNew/Getty Images

Oil has been among the hardest-hit assets in the recent selloff. West Texas Intermediate crude is down 23% since the start of the year, but it has been rallying a bit in the past three days, even as the overall stock market has struggled for direction.

On Wednesday, WTI was up 2.2% to $48.20. Brent, the international benchmark, was also up 1.8% to $52.81 after a big gain Monday and a slight dip on Tuesday.

Analysts and investors gave a few different rationales for the mini-rally, though most center on two ideas. China, the world’s largest oil importer, is starting to recover from the coronavirus. And OPEC is meeting on Thursday and Friday to discuss possible production cuts.

RBC Capital Markets is closely watching Chinese economic activity—even tracking car traffic in major cities. In Shanghai, for instance, weekday traffic is now just about as congested as normal, although it is still low on the weekends. And flights are starting to pick up too: a positive sign for oil prices given that China uses a lot of jet fuel.

“The resurrection of Chinese jet-fuel demand is meaningful given that China comprises 13% of global jet-fuel demand, and is undisputedly one of the major drivers of global oil demand growth,” wrote RBC’s Michael Tran. “For comparison sake, Chinese jet demand is larger than the four largest European countries, combined.”

In a follow-up email to Barron’s, Tran noted that the Chinese data all points in one direction.

“We’re seeing clear signs that economic activity is picking up meaningfully in China, uniformly from flight and port activity, to traffic congestion,” he wrote. “While other regions in Europe and the Middle East will undoubtedly get worse before improving, the fact that the world’s leading engine of oil demand growth (China) has turned the corner cannot be ignored by oil bears.”

Much is also riding on the OPEC meeting, which convenes in Vienna. Absent a decision to reduce output dramatically, the announcements there may not move the market much.

“Current expectations call for a 600,000 barrel per day cut, which would only be a 300,000 barrel per day cut from where they already are, and will be seen as weak, and thus, it may take a cut of 1 million barrels per day if OPEC wants to give the market support,” wrote Chris Midgley, global head of analytics at S&P Global Platts.

Others think that the oil rally has to do with market dynamics. The price was bound for some sort of rebound after the extremely fast drops in recent days, they say.

“I believe that oil prices moved up today as a consequence, both of being oversold, in the near term, and in anticipation of a relief rally as a consequence of a rate cut, and in anticipation of economic stimulus,” wrote Rick Rule, CEO of Sprott U.S. Holdings, an investment management and brokerage firm, in an email to Barron’s late Tuesday.

But Rule cautions that the recent trend may not last long, because “both supplies and surplus productive capacity may limit an upside rally, and many observers continue to believe that the global economy will continue to be affected by the coronavirus, and a soft economy generally.”

Write to Avi Salzman at avi.salzman@barrons.com

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Oil Prices Are Rising Again as China Recovers and OPEC Meets - Barron's
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