Oil fluctuates amid demand concerns and supply squeeze

Analysts are bullish about oil touching $100 per barrel again in the medium term

An oil pump jack at the New Harmony Oil Field in Grayville, Illinois. Oil prices remain volatile. Bloomberg

Oil prices fluctuated on Thursday after closing at higher levels the previous day on expectations of higher demand, following a drop in US crude inventories and continued supply constraints because of Russia’s invasion of Ukraine.

Investors are also considering what impact a potential global recession would have on fuel demand.

After inching up slowly in earlier half of the day on Thursday, oil prices posted a sharp increase later. Brent, the global benchmark for two thirds of the world's oil, was up 3.72 per cent at $97.13 a barrel at 9:33 pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, was trading 3.45 per cent higher at $91.15 a barrel.

Brent futures rose 1.4 per cent to close at $93.65 per barrel at the end of trading on Wednesday, while WTI gained 1.8 per cent to end the day at $88.11 per barrel. Oil also rose slightly during the morning session on Thursday.

“Oil prices are treading water following Wednesday's rally which came on the back of the EIA (Energy Information Administration) inventory data," said Craig Erlam, senior market analyst, UK and Europe, Middle East and Africa, at Oanda. “The surprising and substantial drawdown alongside record crude exports provided a boost just as the price was testing multi-month lows."

US crude stocks fell by 7.1 million barrels in the week to August 12, the EIA data showed and exports hit 5 million barrels per day, the highest on record.

Supply concerns due to the Ukraine conflict and underinvestment in the energy sector are also impacting oil prices.

“Oil prices picked up again yesterday as demand fears dissipated and the focus shifted to supply constraints,” said Daniel Richards, Mena economist at Emirates NBD.

“Opec Secretary General Haitham Al Ghais told Bloomberg that global oil markets remained at risk of a supply squeeze, which is more in keeping with our expectation of a tight second half than the recent falls in prices would suggest to us — although the wildcard remains what comes of renewed urgency in discussions between Iran and the West.”

Iran, an Opec member, is awaiting a reply from the US after responding to the EU proposal to revive the 2015 nuclear deal, which was abandoned by former US president Donald Trump in 2018.

A potential deal would help Iran to pump more oil into the market and ease the supply crunch caused by the Ukraine conflict.

“Crude price completed an ABCD pattern, and it is more likely than not we see the price rebound to the $100 level in the medium run,” said Ipek Ozkardeskaya, an analyst at Swissquote Bank.

“Factors that push oil prices higher remain in play, except for the demand prospects. The war in Ukraine is still on, Russian oil and gas supplies dry out, the European natural gas prices are going through the roof to a point that countries are moving into alternative energy sources ... many governments, including Switzerland, revive methods to produce energy using oil and coal.”

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

However, oil gave up most of its gains in the past 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.

“The IEA [International Energy Agency] warned last week that the switch from gas to oil is also pressuring the oil demand higher, while supply remains fairly tight, and many Opec countries are believed to produce at their maximum capacity,” Ms Ozkardeskaya said.

The Paris-based agency in its monthly report 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 pass pre-Covid levels of 101.8 million bpd next year.

China, the world’s second-largest economy and a top importer of crude, is also focused on supporting growth in the country that will boost demand for oil.

China cut lending rates on Monday to revive demand as the economy slowed unexpectedly in July, with the factory and retail activity slumping under the zero-Covid policy.

“Therefore, there is a stronger case for a rebound in oil prices, than the contrary,” Ms Ozkardeskaya said.

The oil market is tight and “since there is limited spare capacity and expectations of a revival of the Iran nuclear deal are dwindling, it looks like oil needs to head higher", said Edward Moya, senior market analyst at Oanda.

Ehsan Khoman, director of emerging markets research for Europe, the Middle East and Africa at MUFG Bank, is also bullish about oil prices.

“Oil remains under pressure with weaker than expected Chinese data, prospects of a revival in the Iranian nuclear deal, maintained barrels from Russia and broader recessionary angst,” he said.

“However, we reiterate our bullish oil view, which is delayed rather than derailed, with the market remaining in a larger deficit than we expected in recent months, with Russian production expected to decline into first-quarter of 2023 alongside higher demand due to gas-to-oil switching and the end of the record SPR [Strategic Petroleum Reserve] release.”

In March, US President Joe Biden announced plans to release 180 million barrels from the country’s strategic reserves over six months to cool oil markets amid higher prices.

“Looking ahead, our supply and demand forecasts, we continue to expect that the oil market will remain in unsustainable deficits at current prices,” Mr Khoman said.

"Balancing the market hence still requires demand destruction on top of the ongoing economic slowdown, where we are more cautious than consensus."