Oil prices eye weekly gain on U.S. growth, Red Sea concerns

Red Sea supply pressure countered by strong U.S. growth and Chinese stimulus

Oil prices eased on Friday but were still on track for their most substantial weekly increase since October on positive U.S. economic growth and indications of Chinese stimulus measures, which bolstered sentiment for fuel demand.

As of 09:30 GMT, the continuous contract for Brent crude futures trading on the ICE dropped by 62 cents, equivalent to 0.76%, reaching $81.36 per barrel. A similar contract for U.S. West Texas Intermediate (WTI) crude saw a decrease of 71 cents, or 0.92%, trading around $76.65 per barrel.

The Brent benchmark was expected to end the week 4.5% higher, while U.S. oil benchmark WTI was projected to rise by 4.8%, as per Reuters.

Both benchmarks were heading for their second consecutive week of gains, representing the biggest weekly increase since the week ending October 13, following the onset of the Israel-Hamas war in Gaza.

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Oil prices dip on Friday as China speaks to Iran aiming to reduce Red Sea attacks

However, oil prices dipped on Friday due to indications that disruptions of oil supplied through the Red Sea might alleviate.

China has been exerting pressure on Iran to curtail attacks on shipping in the waters off Yemen by the Iran-aligned Houthi militia, which has been assaulting tankers with the aim of ending Israel's assault on Hamas in Gaza. Chinese officials have reportedly urged their Iranian counterparts to assist in reducing these attacks to maintain favorable business relations with Beijing.

Traders anticipate tight supply and increased oil demand

Despite these developments, the Houthis have expressed their commitment to continuing its targeting of ships they say are linked to Israel until aid reaches Palestinians in Gaza, as stated by the group's leader on Thursday.

A deterioration of the security situation in the Red Sea poses a key risk to energy commodities this year, according to a market update from the energy consultancy Rystad recently made available to industry website Rigzone. Investors appear to have factored in continued disruption, given that previous air strikes by U.S. and UK forces in the Red Sea did not prevent these attacks.

“Since mid-January, the U.S. and UK have been drawn into military action in the region, striking Houthi targets inside Yemen,” Ramesh continued.

“However, the U.S. are in a difficult position, balancing relations with Israel while avoiding the conflict spillover over into the wider Middle East region. Recently, the U.S. admitted that Houthi rebels are unlikely to stop their attacks regardless of U.S. action”.

The concerns over disruptions are also reflected in the market structure of Brent futures, where the premium of the first-month Brent future to the sixth-month contract has risen to $2.53 per barrel, marking the highest level since November. This market structure, known as backwardation (when prompt prices are higher than later prices), indicates that traders anticipate supply tightness and increased demand.

U.S. GDP growth, China stimulus drive positive oil demand sentiment

The positive demand sentiment regarding demand was further bolstered by Thursday's data, which revealed that the U.S. economy, the world's largest oil consumer, expanded at a faster rate than expected in the fourth quarter. The U.S. Bureau of Economic Analysis’ estimate of GDP growth for Q4 2023 showed GDP growing by a 3.3% annualised rate — way above the 2% consensus forecast.

China, the world’s second-largest oil consumer, announced significant reductions in bank reserves to stimulate economic growth. The People's Bank of China (PBOC) unveiled it would be reducing the reserve requirement ratio (RRR) for banks by 0.5% on Feb. 5, injecting 1 trillion yuan ($139 billion) in long-term liquidity into the market.

Oil prices also received a boost this week from a more substantial than anticipated draw in crude stockpiles and fuel supply disruptions following a Ukrainian drone attack on an export-oriented oil refinery in southern Russia.

Since the start of the year, WTI has gained close to 7% since the start of the year, while Brent has gone up by 5.5%.

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