NEW YORK: Oil prices surged by 3% to reach a nine-week high on Friday, despite concerns about the potential impact of further interest rate hikes on economic growth and oil demand. Brent futures settled at US$78.47 a barrel, up by US$1.95 or 2.6%, while US West Texas Intermediate crude (WTI) settled at US$73.86, increasing by US$2.06 or 2.9%. This marked the highest close for Brent since May 1 and WTI since May 24, with both benchmarks recording a 5% gain for the week.
Analyst Phil Flynn from Price Futures Group noted that the market is on the verge of a major upside breakout, leading to short covering by investors who have been betting on the decline in prices. After consolidating between US$73 and US$77 for two months, Brent moved into technically overbought territory for the first time since mid-April. This rally has been supported by strong momentum and recent output cuts from Saudi Arabia and Russia, according to Craig Erlam, a senior market analyst at OANDA.
Saudi Arabia and Russia, the top oil exporters, announced fresh output cuts this week. Combined with previous reductions by OPEC+ and its allies, total cuts now stand at around 5 million barrels per day (bpd), equivalent to 5% of global oil demand. Analysts at US financial services company Morningstar expect these production cuts to tighten the market and create supply deficits in the second half of 2023, leading to higher oil prices. Additionally, sources close to OPEC revealed that the organization is likely to maintain a positive outlook on oil demand growth for next year.
Russia’s commitment to reduce oil exports will not require a corresponding cut in production, according to a government source. Vortexa, an oil analytics firm, reported that there are currently 10.5 million barrels of Saudi crude stored in floating storage off the Egyptian Red Sea port of Ain Sukhna, down by nearly half since mid-June. Meanwhile, in the US, energy firms added oil and natural gas rigs for the first time in 10 weeks due to a significant increase in gas rigs.
Equinor ASA has temporarily halted production at its Oseberg East oil field in the North Sea due to staffing shortages. In Mexico, a fire broke out on an offshore platform operated by Pemex in the Gulf of Mexico, resulting in six injuries. Furthermore, the weakening of the US dollar to a two-week low has provided additional support to crude prices. The dollar’s decline came in response to data showing lower-than-expected job growth. However, the data is still strong enough to indicate a potential interest rate hike by the US Federal Reserve later this month. A weaker dollar makes crude more affordable for holders of other currencies and could boost oil demand.
The probability of a 25 basis point interest rate increase at the Fed’s July 25-26 meeting stands at around 95%, up from 92% prior to the release of the job growth data, according to the CME Group Inc’s FedWatch Tool. It is worth noting that higher borrowing costs could potentially hamper economic growth and reduce oil demand. In Europe, high inflation levels and the impact of the conflict in Ukraine have forced companies to implement hiring freezes and lay off employees. In Germany, industrial production unexpectedly fell, casting doubt on the prospects of a swift economic recovery.
Credit: The Star : Business Feed
