Oil price rise on weak dollar and Colonial Pipeline shutdown

Crude oil prices rebounded early Thursday, recovering from a steep decline at the start of the year 2023, after a United States (US) pipeline shut operations for unscheduled maintenance.

Consequent to a tight market supply, brent crude gained 2.5% to $79.75 per barrel and West Texas Intermediate rose 2.6% to $74.70 early Thursday, according to market date. 

US pipeline operator Colonial Pipeline said Wednesday it has halted operations at its Line 3, with a restart scheduled for Jan. 7, Reuters reported. Prior to the pipeline shutdown, oil prices had been hit by uncertainty in the near-term economic prospects for China as COVID-19 cases rise.

Significant disruption is expected in the coming months, followed by a recovery from around the middle of the year, which should boost demand, OANDA analyst Craig Erlam said in a Wednesday note.

The medium-term prospects appear bullish, especially if China can recover strongly, but Russia remains the wildcard in terms of output and influence within the Organization of the Petroleum Exporting Countries and allied producers, Erlam said.

The falling value of the US dollar supported higher oil prices by encouraging traders using other currencies. A weaker dollar further fuels strong demand in the market. Meanwhile, global recession fears lead to lower demand expectations.

Weaker demand worries heightened especially after the IMF’s Managing Director Kristalina Georgieva said one-third of the world’s economies are expected to go into recession in 2023.

Low demand fears are also supported by rising COVID cases in China which cap further price increases. Adding more on demand worries, the world’s second-largest economy, China, significantly increased its first batch of 2023 export quotas for refined oil products.

This shows the country is expecting less consumption.