Oil prices surged to a nine-week high on Friday, climbing approximately 3% amid supply concerns and technical buying. Despite worries about potential interest rate hikes slowing economic growth and reducing oil demand, the rise in prices outweighed these concerns.
Brent futures saw an increase of $1.95, or 2.6%, settling at $78.47 per barrel, while U.S. West Texas Intermediate crude (WTI) rose $2.06, or 2.9%, settling at $73.86. These closing prices marked the highest for Brent since May 1 and WTI since May 24, with both benchmarks finishing the week up approximately 5%.
Analysts attribute the surge in prices to short covering and technical factors. Phil Flynn, an analyst at Price Futures Group, stated that the market is on the brink of a major breakout to the upside, with short-sellers adjusting their positions accordingly. After a period of consolidation, Brent entered technically overbought territory for the first time since mid-April.
The recent rally has also been supported by fresh output cuts announced by top oil exporters Saudi Arabia and Russia. The cuts, totaling around 5 million barrels per day (bpd), were made by OPEC+ (OPEC and its allies), accounting for approximately 5% of global oil demand. Morningstar analysts anticipate that these production cuts will tighten the market, resulting in supply deficits in the second half of 2023 and supporting higher oil prices.
Sources close to OPEC indicate that the organization will likely maintain an optimistic outlook on oil demand growth for the following year. Meanwhile, Russia’s commitment to reducing oil exports will not require a corresponding cut in production, according to a government source.
Other factors contributing to the surge in prices include a decrease in Saudi crude stored off the Egyptian Red Sea port of Ain Sukhna and a weaker U.S. dollar. Vortexa, an oil analytics firm, reported that Saudi crude in floating storage has decreased by almost half since mid-June. The decline in the U.S. dollar makes crude more affordable for holders of other currencies, potentially boosting oil demand.
However, there are still potential challenges in the oil industry. In the U.S., energy firms added oil and natural gas rigs for the first time in 10 weeks, with a notable increase in gas rigs. Additionally, Equinor ASA paused 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 state oil company Pemex, resulting in injuries.
Looking ahead, the U.S. Federal Reserve is expected to resume raising interest rates later this month. While strong job growth supports this decision, higher borrowing costs could potentially slow economic growth and reduce oil demand. In Europe, high inflation and the impact of the conflict in Ukraine have led to hiring freezes and layoffs, casting doubt on a swift economic recovery. Industrial production in Germany unexpectedly fell, further dampening prospects for economic growth. Overall, the surge in oil prices reflects supply concerns, technical factors, and production cuts by major oil exporters. However, potential challenges and uncertainties in global economies may impact oil demand and price stability in the future.