Oil prices move higher on tight supplies

Oil prices recovered on Thursday from a dramatic decline the previous day, supported by tight oil supplies and peak summer consumption, following expectations of slower economic growth and decreased gasoline demand following a rate hike in the United States.

Brent crude prices increased 77 cents, or 0.7 percent, to $119.28 a barrel by 0400 GMT, while U.S. West Texas Intermediate (WTI) crude futures climbed to $116.33 a barrel, up to $1.02, or 0.9 percent.

Overnight, prices fell more than 2% as the Federal Reserve hiked interest rates by three-quarters of a percentage point; the most significant increase since 1994.

The dollar index fell from a 20-year high, easing pressure on oil prices. A higher dollar makes oil bought in U.S. dollars more expensive for holders of foreign currencies, reducing demand. As Western sanctions hampered access to Russian oil, investors remained focused on tight supply and solid demand. Optimism about China’s oil demand rebounding as COVID-19 limitations is eased further boosted the price forecast. The United States crude output increased by 100,000 barrels per day last week to 12 million BPD; the highest level since April 2020, according to statistics from the Energy Information Administration.

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Global demand set to break records

The International Energy Agency made news last year when it called for an end to new oil and gas exploration by the end of the year. A few months later, the IEA demanded additional oil.

This week, U.N. Secretary-General Antonio Guterres warned that investing in additional oil and gas production was “delusory,” urging “all financial actors to reject fossil fuel funding” and instead focus on renewables.

But the U.N.’s top official didn’t stop there. Guterres declared, “The only true path to energy security, stable electricity prices, prosperity, and a sustainable world lies in eliminating polluting fossil fuels — especially coal — and speeding the renewables-based energy transition.” Meanwhile, a barrel of Brent crude is trading above $121, a barrel of West Texas Intermediate is trading above $119, and OPEC just revealed that its supply fell last month. Libya is nearing the end of its oil production, producing just about a tenth of what it did at the start of the year.

U.S. shale companies have flatly refused to change their plans in response to President Biden’s calls to pump more. Saudi Arabia appears hesitant to tap its spare oil capacity. Russia is redirecting oil flows under sanctions; however, few believe it will be able to place all barrels that currently go to Europe elsewhere, predicting a significant loss of output.

To address demand, the European Parliament recently voted in favor of a ban on the sale of internal combustion engine vehicles; which will go into force in 2035. It means that E.V.s must increase from 0.5 percent to 100 percent of all cars in the European Union in eight years.

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Russia can increase oil production in July.

Russia expects to raise oil production next month as export flows are shifted to evade Western sanctions; according to energy authorities, they anticipate domestic oil output will be flat or slightly lower this year.

Russia is close to the February levels of 10.2 million barrels per day (BPD). We expect to expand it further in July, depending on company plans.

After the United States and Saudi Arabia, production from the world’s third-largest producer fell by almost 10% to 10.05 million BPD in April from February; some importers delayed or refused Russian barrels owing to sanctions.

Western sanctions against Russia over the Ukraine crisis drove many oil importers to avoid doing business with Moscow; this caused Russian crude to trade at a discount to other grades. This year, Russian oil production will likely remain unchanged or fall by 3-5 percent.

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