Oil posts weekly gain on improved demand outlook in US and China

Opec+ alliance is expected to extend its output cuts until 2025, analysts say

Oil pump jacks next to a strawberry field in California. Brent is expected to average $88 a barrel and $93 a barrel in the third and fourth quarters, respectively. Reuters

Oil prices settled higher on Friday and posted a weekly gain amid an improved demand outlook in the world’s two largest economies.

Brent, the global benchmark for two thirds of the world's oil, rose by 0.85 per cent to settle at $83.98 a barrel, while West Texas Intermediate, the gauge that tracks US crude, gained 1 per cent to close at $80.06 a barrel.

For the week, Brent and WTI added about 1 per cent and 2 per cent, respectively. Brent notched its first weekly gain in three weeks.

“Oil is making some moderate headway, buoyed by shrinking US stockpiles and a wider risk-on mood triggered by signs of ebbing US inflation [offering scope of looser Fed policy], tugging the US dollar lower,” Ehsan Khoman, head of commodities, ESG and emerging markets at MUFG, said in a research note.

US commercial crude oil stocks decreased by 2.5 million barrels for the week ending May 10, compared with the previous week, indicating higher demand for crude in the world’s largest economy, the latest data from the Energy Information Administration shows.

This week, the US Labour Department reported that Consumer Price Index inflation rose by 3.4 per cent on an annual basis, still well above the Fed's long-term 2 per cent target.

Inflation rose by 0.3 per cent on a monthly basis after a 0.4 per cent gain in March.

Major stock indexes climbed to record highs on Wednesday after the CPI report.

Core inflation, which excludes food and energy prices, rose by 3.6 per cent, its lowest annual gain in three years.

The US Federal Reserve has raised interest rates over the past two years due to high inflation caused by coronavirus-induced supply chain disruptions, geopolitical tension between major world powers and the Ukraine conflict, which pushed oil prices to record levels in 2022.

Demand outlook in China, the world’s second-largest economy and the top importer of crude oil, also improved as industrial output in the country grew by 6.7 per cent on an annual basis in April, boosted by growth in the manufacturing sector, according to the National Bureau of Statistics of China.

Opec, in its monthly oil market report, also kept the global oil demand outlook broadly unchanged for 2024 and 2025 at 2.2 million barrels per day and 1.8 million bpd, respectively, as global economies continue to recover from the pandemic-induced slowdown.

The Opec+ group of countries, which has been cutting oil production by 2.2 million bpd to support oil markets, is expected to extend output cuts until 2025, according to analysts. The alliance will meet on June 1 to decide its future output policy.

“First, Opec+ compliance data signals that an extension of Saudi Arabia’s one million bpd … cut as part of the group’s 2.2 million bpd production curbs would support the kingdom’s near-term oil revenue targets,” Mr Khoman said.

“Second, higher-for-longer interest rates have raised the gravitas of near-term oil revenues to fund large-scale investment programmes for core Opec+ producers.”

Brent is expected to average $88 a barrel and $93 a barrel in third and fourth quarters, respectively, Mr Khoman said.