Oil prices settle lower but post weekly gain as demand outlook improves

The market continues to remain tight amid supply concerns due to Ukraine conflict

Oil was on track to post gains for the week amid supply concerns and improved demand. AFP

Oil prices settled lower on Friday but posted weekly gains, as investors weighed continued supply disruptions amid the Russia-Ukraine crisis against an improved demand outlook, driven by use of oil for power generation.

Brent, the global benchmark for two-thirds of the world's oil, settled 1.46 per cent lower at $98.15 per barrel at the close of trading on Friday. West Texas Intermediate (WTI), the gauge that tracks US crude, slid 2.38 per cent at $92.09 a barrel.

Brent climbed 3.4 per cent for the week, following last week's 14 per cent fall, its biggest weekly decline since April 2020 on recession fears and its impact on fuel demand. WTI rose about 3.5 per cent.

“The IEA [International Energy Agency] says that the soaring gas prices boosted the use of oil-power generation and that the ‘substantial’ gas-to-oil switching is, in return, set to boost crude consumption for the rest of the year, even as demand growth from other parts of the economy slows, due to higher price pressures, and slowing economic activity,” Ipek Ozkardeskaya, an analyst at Swissquote Bank, said.

The Paris-based agency in its monthly report on Thursday said global oil demand growth would jump by 380,000 barrels per day to 2.1 million bpd this year.

The agency estimates total world oil demand to reach 99.7 million bpd in 2022 and surpass pre-Covid levels of 101.8 million bpd next year.

From the technical perspective, oil prices have completed an ABCD pattern, which could be a bullish encourage a “bullish breakout” that could support a rebound towards the $100 per barrel level in the short to medium run”, Ms Ozkardeskaya said.

Oil prices have remained volatile this year. Brent touched about $140 barrel in March following Russia’s invasion of Ukraine and the subsequent sanctions by the US and the UK on the import of Moscow’s crude.

However, However, oil it gave up most of its gains in the last few months, as concerns grew over the possibility of a recession hitting fuel demand globally.

Brent has declined from its recent peak of $123 per barrel, but it is still up more than 20 per cent since the beginning of this year.

In July, the International Monetary Fund lowered its growth forecast for the global economy to 3.2 per cent this year, from its previous forecast of 3.6 per cent in April, Russia’s war in Ukraine, high inflation and the Covid-19 pandemic.

“The oil market has bounced back this week, with Brent once more flirting with triple-figures,” said Craig Erlam, senior market analyst, UK and Europe, Middle East and Africa, at Oanda.

“There's been a lot to digest this week, with Iran nuclear talks ongoing, US inventories rising, US output also rising, the Druzhba pipeline saga and the various forecasts.”

Ukraine halted flows through the Druzhba oil pipeline towards Hungary, the Czech Republic and Slovakia on August 4, as sanctions prevented Moscow’s transit payments to Kyiv. However, supply from Russia resumed this week following transit payments from Moscow to Ukraine.

US crude inventories also rose more than two million barrels per day in the first week of August, putting further pressure on prices. The American Petroleum Institute reported a surprise increase of 2.156 million barrels for the week ended August 5.

Opec, however lowered its global oil demand forecast for this year amid the continued war in Eastern Europe, continued coronavirus pandemic-related movement restrictions and high inflation.

Oil demand is expected to rise by 3.1 million bpd in 2022, down 260,000 bpd from the previous forecast, the group said in its monthly market report on Thursday.

Global oil consumption in 2022 is projected to average 100 million bpd, it added.

“All things considered, the price moves highlight just how tight the market remains and how sensitive it therefore still is to spikes,” Mr Erlam said.

“A deal between the US and Iran could go some way to changing that but I think it's clear traders are not banking on that given how the talks have gone until this point.”

Nuclear deal talks in Vienna concluded earlier this week, with the EU suggesting a final text will now be put forward for the US and Iran to either agree upon or reject.

The deal would pave way for Iran to pump more oil into the market, which would put further downward pressure on oil prices.

“Over the immediate term, whether oil benchmarks can keep their heads above their 200-day moving averages could well depend on whether markets pay greater heed to recession fears or supply-side risks,” said Han Tan, chief market analyst at Exinity.