Oil falters despite tight supply while economic anxieties grow

OIL slipped and wiped out this week’s modest gain amid concerns that high prices are adding to the risks facing the global economy.

West Texas Intermediate futures declined 0.6 per cent in New York, erasing an earlier advance, to trade near US$113 a barrel. US motorists face soaring costs as the nation heads into its peak holiday driving period with gasoline stockpiles at the lowest seasonal level since 2014. 

The Group of Seven urged Opec to pump more oil as the cartel and its allies, which have rebuffed calls to open the taps, prepare to meet next week. Bank of America warned that a loss of Russian exports following the invasion of Ukraine “could trigger a full-blown ‘80s-style oil crisis.”

Earlier this week, China’s Premier Li Keqiang gave his starkest warning yet about the economy as it comes under severe strain from Covid outbreaks and lockdowns, suggesting the government’s growth target is moving further out of reach.

“If supply does not recover, oil demand may have to ease,” Bank of America analysts led by Francisco Blanch wrote in a report, saying that Brent futures could soar to USUS$150 a barrel.

Fuel markets have tightened globally following Russia’s Ukraine invasion in late February, which has upended trade flows and fanned inflation. The Biden administration is reaching out to oil companies to inquire about restarting shuttered refineries, according to a person familiar with the matter.

Oil has advanced during the past four weeks, bringing this year’s gains to more than 50 per cent, and many analysts believe the immediate outlook remains bullish. 

Markets remain in backwardation, a bullish pattern that’s marked by near-term prices trading above longer-dated ones. The prompt timespread for Brent was at US$3.54 a barrel on Friday, compared with US$2.56 a week ago. For WTI, the gap has widened to almost US$3, from US$1.75 at the start of the month.

“With the driving season coming up, refineries coming out of maintenance and the weather in the Middle East getting warmer, oil demand will ramp up - and oil inventories are low,” said Giovanni Staunovo, an analyst at UBS AG in Zurich. 

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Upside has been capped by a virus resurgence in China, which continues to weigh on the outlook for demand as the world’s biggest crude importer sticks with its Covid Zero strategy.

China may issue state refiners additional fuel-export quotas to clear high inventories that have swelled during lockdowns, according to people familiar with the matter. Volumes and timing remain unclear at this stage, although industry consultant JLC said recently it could total 3.5 million tons. BLOOMBERG