Futures Movers: Oil gives up gain late, ends down almost 5% for week as China demand worries overhang market

Don’t miss: Fed’s Bullard set to talk inflation, interest rates in MarketWatch Q&A Monday

Price action

West Texas Intermediate crude for January delivery
CL.1,
-1.71%
CL00,
-1.71%
CLF23,
-1.71%
rose 27 cents, or 0.5%, to $78.31 a barrel on the New York Mercantile Exchange, tracking a weekly drop near 2%. U.S. markets were closed Thursday for Thanksgiving Day.

January Brent crude
BRNF23,
-1.59%,
the global benchmark, rose 15 cents, or nearly 0.2%, to $85.51 a barrel on ICE Futures Europe. January Brent settled just in negative territory Thursday. February Brent
BRN00,
-1.44%
BRNG23,
-1.44%,
the most actively traded contract, was up 22 cents, or 0.3%, at $85.46 a barrel, on track for a weekly decline of 1.8%.

Back on Nymex, December gasoline
RBZ22,
-4.11%
fell 1.2% to $2.4439 a gallon, while December heating oil
HOZ22,
-2.85%
jumped 1.9% to $3.4216 a gallon.

December natural gas
NGZ22,
-4.67%
was down 0.4% at $7.278 per million British thermal units, but was headed for a weekly gain of more than 15%.

Market drivers

Crude prices have retreated sharply in November, with weakness attributed in part to disappointment over China’s continued COVID-19 restrictions. The country, one of the world’s largest energy consumers, has continued to impose restrictions aimed at containing the spread of the virus.

Read: Beijing on edge as city adds new quarantine centers

“Lockdowns in all but name appear to be popping up in major Chinese cities in an attempt to get a grip on record cases, which will weigh heavily on economic activity once more and in turn, demand,” said Craig Erlam, senior market analyst at Oanda, in a note.

“It’s now a question of how long they last, but clearly investors’ enthusiasm toward the relaxation of COVID restrictions was a bit premature,” he said.

China’s central bank on Friday moved to provide some stimulus to the economy, lowering the amount of deposits banks have to set aside. The action released 500 billion yuan ($69.91 billion) of liquidity.

See: China cuts banks’ Reserve Requirement Ratio

Meanwhile, European diplomats on Wednesday were unable to come to an agreement on a Group of Seven plan to put a price cap on Russian crude, the latest measure aimed at curtailing the country’s economy in response to the invasion of Ukraine.

Officials were expected to hold further talks in an effort to come to an agreement ahead of a Dec. 5 deadline when the cap is supposed to take effect alongside a European embargo on Russian oil.

See also: IEA says Europe can cope with energy crunch, this winter, but the next will be a problem

“In October, the EU still imported about 2.4 million barrels a day of Russian oil. In the coming months, not only will Russia need to find other buyers, the EU will need other suppliers. Much of that can happen, but probably not fully, smoothly, fast and without price impact,” market analysts from Morgan Stanley led by Martijn Rats said in an outlook for early 2023.

Citing the Russian cap situation, the analysts’ expectation for improved Chinese demand, a continued ramp up of aviation traffic, limited U.S. shale supply and other factors, the team has a neutral-to-bullish crude-price outlook heading into next year.

“Our balances point to modest oversupply in coming months. Hence, we see Brent prices rangebound in the mid-80s to high-90s first,” the Morgan Stanley team wrote. “However, the market will likely return to balance in 2Q23 and undersupply in 2H23. With limited supply buffer, we expect Brent to return to about $110/bbl by the middle of next year.”

Weekly data on the number of U.S. oil rigs, typically due on Friday, was released Wednesday due to the Thanksgiving holiday. Oil-field services firm Baker Hughes said the number of U.S. oil rigs rose by 4 to 627, while gas rigs fell 2 to 155 and miscellaneous rigs were unchanged at 2. That left the number of oil rigs up 160 from the same time last year, while gas rigs were up 53 and miscellaneous rigs were up 2.