Oil prices were up early on Friday, headed for a small weekly gain, but a gain nevertheless—the fourth in a row—as gasoline and diesel supply globally struggle to meet rising demand just ahead of the summer driving season.
The discount of WTI relative to the international benchmark Brent has disappeared as product inventories in the United States are at multi-year lows while domestic gasoline demand continues to rise despite the record-high prices. Demand is further expected to increase as the Memorial Day holiday weekend and the summer driving season approach.
Oil had a very volatile week, again, as bullish and bearish market forces pulled prices in both directions. Concerns about a global economic slowdown, and even a recession, spooked investors and speculators in the middle of the week, and the oil market joined on Wednesday the massive sell-off in equities on Wall Street where the Dow Jones Industrial Average (DJIA) index suffered its worst day since 2020. Fears of a recession, with analysts saying the odds are rising, prompted market participants to pull out of many risky assets, including crude oil futures.
On the bullish side, China has signaled a tentative reopening in Shanghai from June 1, despite finding on Friday five new COVID cases outside quarantined areas in the city.
Low U.S. fuel inventories and another decline in gasoline stocks last week supported oil prices, and will continue to do so, analysts say, as supply will struggle to catch up with higher demand in the summer.
“The fact the market has not fallen below $100 highlights the underlying strength with tight supply of key fuels, self-sanctioning of Russian crude oil, OPEC struggling to increase production and unrest in Libya all supporting the market. With China potentially starting to ease lockdowns and with unrest in Libya still growing, the short-term price risk remains firmly skewed to higher prices,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said in a weekly note.
“So, despite the prospect for slower global economic growth, the price of crude oil remains supported. If we stick to our wide $90 to $120 range call for Brent during the current quarter, while still considering structural issues (most importantly the continued level of underinvestment and OPEC’s struggle to increase production), this will continue to support prices over the coming quarters,” Hansen added.
By Tsvetana Paraskova for Oilprice.com
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