The Ingredients for a Continued Rise in Oil Prices Fully Gathered

(BFM Bourse) – The price of Brent oil futures hit the $120 a barrel mark again on Monday morning, as the European Union is still trying to get Hungary to join the proposed gradual embargo on oil. Russian supplies, and while the Chinese authorities loosen the grip of the containments a little.

No other direction than up. For most operators in the oil market, all the conditions are in place to see oil prices continue to rise this summer, after having already doubled since the end of 2021. On the supply side, alternative sources are lacking while geopolitical threats increase on the usual supply routes. On the demand side, the approach of the summer peak and a possible lifting of restrictions on activity in China are fueling the global appetite for black gold.

North Sea crude benchmark Brent hit $120 on Monday morning for the first time since March 24. A first factor, seasonal, of increase in demand, takes place with the advent of the “driving season”. Strictly speaking, this refers to the season for motorized getaways in the United States from the first long summer weekend, that of Memorial Day (intervening in 2022 this Monday, May 30) when Americans take the road to visit relatives or leave in the open air. The driving season ends with Labor Day (i.e. in 2022 the long weekend of September 5). With the United States still accounting for around 10% of global gasoline consumption, the scale of travel within the country is significant, but the phenomenon actually extends to virtually the entire northern hemisphere. This year, an exceptional factor could be added to it, the Chinese authorities seem to be preparing to loosen the vice of confinements in Shanghai and Beijing. However, if economic activity picks up speed in China, the demand for oil will automatically follow.

These elements come as the escalation of Western sanctions against Russia threatens to exclude one of the world’s three largest players (with Saudi Arabia and the USA) from a good part of the world market, if the members of the European Union manage to agree on an embargo. Due to the opposition of Hungary, the Twenty-Seven did not reach an agreement on this point on Sunday but the negotiations must continue during an extraordinary summit of the European Council on Monday and Tuesday. Negotiators could propose a two-step ban, leaving pipeline supplies (which supply Germany and various eastern countries including Hungary) open for a while while tanker shipments would be banned.

On the supply side, the energy ministers of OPEC countries and their allies who are not formally members of the organization (collectively dubbed OPEC+) will hold their monthly meeting on Thursday, by videoconference as has been the case since two years. But analysts see little chance of the cartel announcing any move to breathe new life into the market, given OPEC+’s apparent difficulty in ramping up output after years of underinvestment. OPEC members and their allies are likely to be content to reaffirm the trajectory of moderately re-increasing their output, according to sources interviewed by Reuters.

It should be recalled that after a drop in production of around 10 million barrels per day in the spring of 2020, the enlarged cartel aims to restore its previous production by steps of 400,000 additional barrels each month, a rate implying that production will not be fully recovered only after nearly two years. In fact, several producer states (Iraq, Venezuela, Libya, etc.) are struggling to relaunch their production at the planned rate.

Guillaume Bayre – ©2022 BFM Bourse

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