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Fuel demand optimism boosts oil prices due to China’s border opening

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Fuel demand optimism boosts oil prices due to China's border opening

Oil prices rose on Monday as China reopened its borders, boosting optimism for fuel demand growth and offsetting concerns about a global recession. This move is part of China’s efforts to combat COVID-19.

Domestic travel during the Lunar New Year season is expected to nearly double last year’s levels, with 2 billion trips anticipated. This is a recovery to 70% of 2019 levels. The increase in travel has prompted airlines to boost their international seat capacity to and from China by 9.5% in January.

Despite the positive impact on oil prices, there are concerns about the potential for a surge in COVID infections due to the increased travel. Brent crude futures rose 1.2% to $79.47 a barrel, while U.S. West Texas Intermediate (WTI) crude increased 1.2% to $74.67. Both Brent and WTI experienced their biggest weekly declines at the start of the year since 2016, falling more than 8% last week.

The market structure for both front-month Brent and WTI contracts is in contango, with current prices being lower than prices for later-delivery contracts. This typically indicates bearish sentiment for the market. Energy futures for crude oil, refined products, and natural gas have decreased in the New Year as traders have reconsidered near-term worries over cold weather and fears of supply shortages and dumped contracts.

Last week, U.S. energy firms cut the number of operating oil and natural gas rigs by seven, the biggest weekly decline since September 2021, according to energy services firm Baker Hughes. Hints of less aggressive U.S. interest rate rises are boosting financial markets and depressing the dollar, making dollar-denominated commodities more affordable for investors holding other currencies.

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