Oil prices rose on Friday as softer-than-expected U.S. inflation data raised hopes of smaller interest rate hikes by the Federal Reserve. This led to a broader rally in risk-driven assets, showing that sharp interest rate hikes by the Fed were bearing fruit. The data indicated that the central bank may take some pressure off the economy in the coming months, which was beneficial to oil prices. Despite the increase, concerns over slowing economic growth and a COVID spike in China led crude to trade negative for the week.
Crude markets witnessed an uptick with Brent crude rising by 0.3% to $93.96 a barrel and WTI crude increasing by 0.4% to $86.78 a barrel in early Asian trade. Both contracts saw strong gains following the inflation data but were still on track to end the week about 5% to 6% lower. The optimism was further bolstered by Hong Kong relaxing some COVID restrictions for inbound travelers, leading to speculation that China may also follow suit. However, the country is currently grappling with its worst COVID outbreak since May, dampening hopes of an immediate change in policies.
The biggest weight on crude prices this week was concerns over sluggish Chinese demand, as local authorities dismissed rumors of scaling back its zero-COVID policy. China, being the world’s largest crude importer, experienced a demand slowdown this year due to its strict anti-COVID measures, which significantly impacted crude prices. In addition, worries about a global economic slowdown due to rising inflation and interest rates also affected sentiment in oil markets. While U.S. inflation eased in October, it still remained above the Fed’s annual target of 2%, posing a risk to economic growth and oil demand.
The upcoming data release on GDP from the UK is expected to provide further insights into the state of developed economies. On the other hand, tightening oil supply, driven by production cuts and sanctions on Russia, could potentially benefit crude prices in the medium-term. Despite the challenges posed by a potential economic slowdown and COVID-related disruptions, the optimistic outlook for oil prices in the near future is fueled by positive developments in global markets. Investors are closely monitoring the evolving situation to gauge the impact on oil demand and supply dynamics, as well as the overall economic landscape. The combination of these factors will play a crucial role in shaping the trajectory of oil prices in the coming weeks.
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