Industry Updates

Brent Crude oil ETC sees record $1bn inflows on easing China lockdown restrictions

Supply and demand pressures on oil prices

Tom Eckett

Oil jacks markets

Investors piled into WisdomTree’s Brent Crude oil exchange-traded commodity (ETC) last month amid supply and demand side pressures from OPEC and the easing of COVID-19 lockdown restrictions in China.

According to data from WisdomTree, the WisdomTree Brent Crude Oil ETC (BRNT) saw $1bn inflows in December, a record monthly intake since the strategy was launched in February 2012, in a sign investors believe prices have hit a floor.

Oil prices soared to as high as $139 a barrel in 2022, its highest level since 2008, driven by the easing of global lockdown restrictions and Russia’s invasion of Ukraine.

However, prices fell below $80 a barrel for the first time since January 2022 last month as central banks hiked rates at an aggressive pace and markets jittered about the prospects of a looming recession.

Investors are now predicting oil prices to spike once again as China demand increases as lockdown restrictions end and the Organisation of the Petroleum Exporting Countries (OPEC), and its allies, continue to remove supply from the market.

According to the Energy Information Administration (EIA), global oil production is yet to reach its peak of 84.6 million barrels per day (bpd) in November 2018 with OPEC controlling approximately 45% of the market.

As Warren Patterson, head of commodities strategy at ING, said: “There is still plenty of uncertainty over Russian oil supply given the EU’s ban on Russian crude oil and refined products.

“However, we believe that Russian supply will fall significantly early this year – in the region of 1.8 million bpd year-on-year in Q1. This supply loss coupled with continued OPEC+ supply cuts suggests that the oil market will tighten over the course of 2023.”

Meanwhile, the easing of lockdown restrictions in China has caused a surge in COVID-19 cases which is having a negative impact on oil prices.

However, Nitesh Shah, head of commodities and macroeconomic research, Europe, at WisdomTree, said he expects to see a “sharp increase” in energy consumption once COVID-19 cases start to reduce.

“Many investors in BRNT want to play the China reopening trade and are looking beyond this near-term turbulence with large increases in COVID-19 cases,” Shah continued. “It came surprisingly at the tail end of last year as not many were expecting the rapid reduction in COVID-19 restrictions.”

Overall, the outlook for oil prices remains relatively volatile, according to Peter Nagle, senior economist at the World Bank, due to the number of factors that could impact global supply and demand including OPEC+ production capacity, the outlook for US oil, a looming global recession and China demand.

Shah added this counterbalance between China demand and the OPEC cartel’s ability to control supply will drive oil prices to over $90 a barrel in 2023.

In its outlook for 2023, US giant Wells Fargo predicted oil prices are set for another positive year amid production challenges in the US.

“The US, as an example, has slowed its production growth while US policy preferences have shifted toward renewable energy sources,” it said.

“Sensing this shift in US policies, the OPEC+ has made key strategic moves to minimise supplies while maximising price. Limited global production growth will likely keep prices moving higher over the next few years.”

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