Oil treads water but set for strong weekly gains as inflation fears ease

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By Ambar Warrick 

AiVIF.com-- Oil prices moved little in early Asian trade on Friday, but were set for sharp gains this week on signs of slowing inflation in the U.S., while optimism over a Chinese economic reopening also spurred bets on improving demand in 2023. 

Crude prices jumped on Thursday after data showed U.S. consumer price index inflation eased further in December from the prior month, pointing to a less hawkish outlook for the Federal Reserve in raising interest rates. 

This weighed heavily on the dollar, and points to an eventual easing in pressure on economic activity from high borrowing costs, which is positive for crude prices.

Brent oil futures steadied around $83.91 a barrel, while West Texas Intermediate crude futures inched down 0.1% to $78.34 a barrel by 20:22 ET (01:22 GMT). Both contracts were up more than 6% this week, with Brent also eyeing its best weekly performance since early-October.

The strong weekly gains mark a sharp reversal for oil prices after a weak start to the year. 

Gains this week were also driven by increased optimism over an economic recovery in China, after the world’s largest crude importer reopened its international borders for the first time in three years. 

Media reports show that Chinese urban hubs are seeing record-high degrees of road congestion levels, while domestic airlines are also seeing a spike in passengers since December. This trend bodes positively for fuel demand in the country, with Beijing also recently publishing higher crude import quotas for 2023. 

The soft U.S. inflation reading and optimism over China helped markets largely brush off data showing a massive build in U.S. oil inventories in the first week of January. The reading brewed some concerns over sluggish near-term demand in the country, as several states also grapple with adverse winter weather conditions.

Concerns over rising COVID-19 cases in China have also weighed on oil prices in recent sessions, especially as the country faces its worst yet outbreak after it relaxed most of its anti-COVID restrictions. Analysts warned this could delay a broader economic recovery.

But the biggest headwind to oil prices is the fear of a potential recession this year, as the effects of sharp monetary policy tightening through 2022 are felt, and as business activity slows. 

While U.S. inflation is slowing, it is also accompanied by a corresponding slowdown in business activity, which could dent fuel demand this year.