Data from the Energy Information Administration showed that U.S. oil inventories grew slightly more than expected in the last week of December. Still, a sharp drop in distillates and shrinking gasoline inventories indicated strong crude consumption through the holiday season. In addition, China, the world’s largest crude importer, announced plans to reopen its border with Hong Kong, raising expectations for an eventual economic recovery and an increase in oil demand. However, Brent and West Texas Intermediate crude futures were still on track to lose about 7.5% for the week after a poor start to the year.
Dollar Strength Limits Gains in Crude Prices
The strength of the U.S. dollar limited gains in crude oil prices on Friday as investors awaited nonfarm payroll data, which is expected to show some easing in the country’s tight jobs market. While markets were wary of any resilience in the jobs market, which could give the Federal Reserve more room to maintain its hawkish stance, the minutes from the central bank’s December meeting showed support for smaller rate hikes in the coming months. However, the call to keep U.S. interest rates higher for longer could weigh on economic activity and decrease crude demand.
Oil Prices Plunge on IMF Warning of Potential Recession
Oil prices significantly dropped in the first two sessions of 2023 after the International Monetary Fund warned of a potential recession in several major economies. Weak economic data from the U.S. and China, the two largest oil consumers, added to concerns over a downturn as both countries saw shrinking manufacturing activity in December. In addition, rising COVID-19 cases in China fueled fears of a slowed reopening in the country, which could stifle economic growth and cause increased market volatility in the near term.
