Oil prices posted their first weekly gain after a volatile month despite the global economy slowing, as demand for crude remains strong and the Opec+ alliance of 23 producers prepares to meet next week to decide future output levels before the expiry of their 2020 reduction pact.
Brent, the benchmark for two thirds of the world's oil, settled about 2.1 per cent higher at $103.97 at the close of trading on Friday.
West Texas Intermediate, the gauge that tracks US crude, closed up nearly 2.3 per cent at $98.62 a barrel as the latest data from the US Energy Information Administration showed that crude oil inventories for the week ending July 22, excluding the Strategic Petroleum Reserve, decreased by 4.5 million barrels from the previous week.
“The ongoing tightness in oil markets is being buttressed by expectations that Russian oil supply will edge lower in the months ahead as plans for a price cap on Russian barrels may have the opposite effect on oil prices than envisaged,” said Ehsan Khoman, director of emerging markets research for Europe, the Middle East and Africa at MUFG Bank.
“On net, we believe the leg lower in crude oil has overshot. Granted, the risks of a future recession are growing but key to our bullish conviction is that the current oil market deficit remains unresolved.”
Before the outbreak of the Ukraine war, Russia was the world's second-largest energy exporter.
Along with Saudi Arabia, Russia heads the Opec+ super group of oil producers, which is set to meet on August 3 and 4 to decide what to do with spare capacity once the production pact expires at the end of next month.
The group has been gradually unwinding record output cuts put in place during the Covid-19 pandemic, which plunged the global economy into its deepest recession since the Second World War.
"All eyes are now on that meeting which will take place against the backdrop of lower economic growth forecasts, heightened recession risks and a US economy that may or may not already be in recession, depending on who you're talking to," said Craig Erlam, a senior market analyst at Oanda.
The latest figures for the world's largest economy on Thursday showed that US gross domestic product decreased for a second consecutive quarter, dropping 0.9 per cent on an annual basis in the three-month period to the end of June, after a 1.6 per cent decline in the first quarter of the year.
The data came after the IMF lowered its 2022 growth forecast for the global economy for the second time this year to 3.2 per cent on Tuesday, due to Russia’s war in Ukraine that has exacerbated inflationary pressures.
Even with rising concerns about a potential global recession — as a result of the Ukraine war — and rising inflation that have derailed the momentum of the economic recovery from the pandemic, data points to oil demand holding up in the third quarter of this year at an average of 100.3 million barrels per day, from 98.7 million bpd in the second quarter, according to MUFG estimates.
Opec this month estimated in its regular outlook report that global oil demand would continue to grow next year, with Opec producers required to pump close to a million barrels more a day in 2023.
“While the probabilities of a recession are rising, it is premature for the oil market to be yielding to such concerns right now,” Mr Khoman said.
“The global economy is still growing, albeit slowing [not contracting], with the rise in oil demand this year set to significantly outperform GDP growth, supported by the post Covid reopenings in Asia, as well as the resumption in international travel spurring jet fuel demand.”
The economy of India, the world's third-largest importer and consumer of oil, is forecast to grow by 7.4 per cent this year and 6.1 per cent in 2023, according to the International Monetary Fund.
“Even as markets grapple with the prospect of a recession, the supply situation around oil remains particularly tight, allowing prices to remain relatively high,” Emirates NBD economists said in a note on Friday.
MUFG forecasts that Brent will average of $118.88 a barrel in 2022 and $106.13 next year. It estimates WTI will end this year at an average of $114.59 a barrel and $102.25 in 2023.