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Oil prices may have already bottomed in 2023, says RBC

Analysts at RBC Capital Markets are eyeing an "unequivocally bullish" Chinese reopening

A staff member refuels a vehicle at a gas station in Qingzhou, east China's Shandong Province, Jan. 3, 2023.  China will raise the retail prices of gasoline and diesel from Wednesday, based on the recent rise in international oil prices.   Gasoline and diesel prices will be up by 250 yuan about 36 U.S. dollars per tonne and 240 yuan per tonne, respectively, the National Development and Reform Commission said in a Tuesday statement. (Photo by Wang Jilin/Xinhua via Getty Images)
RBC says investors should watch prices for industrial metals as a leading indicator for rising Chinese oil demand. (Photo by Wang Jilin/Xinhua via Getty Images)

Oil may have already bottomed for 2023, less than a month into the year. That's according to analysts at RBC Capital Markets eyeing an "unequivocally bullish" Chinese reopening among factors that will see North American benchmark prices average US$92 per barrel.

After pushing above US$82 last week, West Texas Intermediate (WTI) (CL=F) slid to US$78 per barrel on Monday. Investors are weighing the Federal Reserve meeting on Wednesday, widely expected to result in another rate hike, against an improving demand outlook in China, the world's largest oil importer.

"We would not be the least bit surprised if the lows of the year end up being the US$72 per barrel print that we saw three weeks ago on the second trading day of the year," RBC's Michael Tran wrote in a note to clients on Sunday evening. "Is this a bold call less than a month into the calendar year? Maybe, but China's reopening is hardly being priced into the oil market."

On Monday, Chinese officials said the COVID-19 situation in the country was at a "low level" following the Lunar New Year holiday. Tran says investors should watch prices for industrial metals, with the oil complex likely to follow a move higher for copper and iron ore driven by more activity in China.

Tran says while WTI and European Brent have traded largely unchanged since Dec. 1, prices for copper and iron have "drastically outperformed," while aluminum and nickel have also rallied.

"This makes sense. Following several years in which the Chinese government prioritized public health over the economy, the 180-degree turn towards reopening punctuates a shift towards stimulating growth," Tran wrote.

"What is less clear, at least for now, is the path of the rebound in societal behaviour. Following several long years of lockdowns, the COVID fear factor is likely high, meaning that a rebound in consumer behaviour is potentially subject to fits and starts, particularly if COVID case counts and hospitalizations spike post Lunar New Year," he added.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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