Oil rallies as China's emergence from lockdown puts upward pressure on demand

Oil prices extended their bull run in early trading on Monday as the market factored in higher demand from China, the world's biggest importer of crude, which is currently easing Covid-19 restrictions.

Brent, the global benchmark for two thirds of the world's oil, gained 0.81 per cent to $120.70 a barrel at 6.50am UAE time. West Texas Intermediate, the gauge that tracks US crude, was 0.85 per cent higher to $119.90 a barrel, the highest in about three months. Both benchmarks are up more than 70 per cent since last year as developed economies recover from the coronavirus pandemic, Russia's military offensive continues into its fourth month and the EU presses forward with banning most of Russian oil imports by the end of this year.

Prices are also elevated as the oil market remains tight due to supply shortages and rising demand as the US and Europe head into the summer season. "While China relaxing Covid curbs and Saudi Arabia hiking selling prices to Asia and Europe are supporting prices, potential Venezuelan shipments to Europe are providing temporary resistance," said Jeffrey Halley, a senior market analyst at Oanda.

Saudi Aramco raised its prices for Asian customers by $2.10 a barrel from June to $6.50 above the benchmark it uses, before a boost of $1.50 expected by the market, according to Bloomberg. Aramco also increased its prices for north-western Europe and the Mediterranean regions, the news agency reported.

The rally in oil prices has exacerbated inflationary pressures globally, resulting in the International Monetary Fund, the World Bank and the Institute of International Finance slashing their forecasts for the world economy this year. Rising interest rates and an energy crunch in Europe have also raised fears that developed economies will slide into a recession.

Last week the 23-member Opec alliance of producers agreed to increase its July and August output by about 50 per cent to 648,000 barrels per day. This will bring an additional 216,000 bpd on top of its scheduled 432,000 bpd coming to the market next month. The increase will be divided proportionally among members of the alliance. Oil prices gained more than 3 per cent last week.

"With the Opec+ plan to accelerate some of the return of its production failing to convince markets, oil prices moved higher last week," Emirates NBD economists said in a research note on Monday.

Saudi Arabia, the world’s biggest oil exporter, the UAE and Iraq are among the Opec members that have capacity to boost output. The kingdom, which produced 10.4 million bpd in April and 10.3 million bpd in March, has a production capacity of 12 million bpd.

US crude production is about 11.9 million bpd. The latest data from the Energy Information Administration on Thursday showed that US crude inventories fell by about 5.1 million barrels to 414.7 million barrels, below the five-year average. “With the sheer velocity of the supply shock coming after two years of steadily depleting inventories, we believe that markets are now marching towards a period of clear and persistent demand destruction,” said Ehsan Khoman, director of emerging markets research for Europe, the Middle East and Africa at MUFG Bank.

“With negligible inventory buffers left, we believe prices will have to keep rising until the shock is resolved or demand realigns itself with supply.” MUFG forecasts that Brent will peak at $141 a barrel in the third quarter of this year before falling to an average of $112 barrel in the last quarter of 2022. "Whichever way you look at it though, both Brent and WTI prices are nearing post-Ukraine highs, stripping at the days of the initial hostilities themselves," said Mr Halley.

"Returning Venezuelan and Libyan production to Europe and North America, should it occur, will not be material enough in the shorter term to force prices lower. Refining margins globally suggest that demand for petrol and diesel remain in heavy demand, with the refining logjam in refined products backstopping crude prices."