US oil futures continued to rise throughout the holiday-shortened trading week, ultimately settling at $80.70 a barrel. This marks the third consecutive week of gains for West Texas Intermediate (WTI) crude oil, even though many economic indicators are suggesting that the US economy is quickly weakening due to supply chain disruptions and an increase in COVID-19 cases.
While the oil markets have been closely monitoring developments with the Ukraine crisis, the recent significant uptick in COVID-19 cases worldwide has raised some concerns for market participants. The rapid spread of infections has led to renewed lockdown measures in various countries, which can potentially hinder oil demand in impacted regions.
Despite these headwinds, WTI has shown resilience in maintaining prices above $80 a barrel. According to Edward Moya, a senior market analyst at OANDA, “WTI isn’t going to budge from the $80 a barrel level, even as the headlines suggest the US economy is quickly weakening.”
One of the factors that has likely supported oil prices is the ongoing optimism surrounding the prospect of a US-Iran nuclear deal. Market participants hope that an agreement might pave the way for increased Iranian oil exports, eventually easing the current tight supply conditions in global oil markets.
In addition to the geopolitical factors, US inventory data released by the Energy Information Administration (EIA) has provided a supportive backdrop for oil prices. The EIA’s weekly report showed that US crude oil inventories decreased by 3.4 million barrels for the week ending April 8th, significantly exceeding analysts’ expectations for a decline of around 1 million barrels. This indicates that oil demand remains strong, particularly in the United States, the world’s largest crude oil consumer.
Despite the seemingly bullish factors, some analysts have voiced concerns about the sustainability of oil above $80 a barrel. Ole Hansen, a strategist at Saxo Bank, expressed concerns about the risks associated with an uneven global demand recovery, particularly given the current high price levels of gasoline and diesel. High energy prices can deter economic growth and ultimately restrict overall oil demand.
Other factors that could potentially weigh on oil prices include potential increases in production to capitalize on high prices. Russia’s state-owned company, Gazprom, has announced plans to increase output in the coming months, and other producers looking to take advantage of the current elevated price environment might follow suit.
On the US domestic front, the rise of shale oil production could also put downward pressure on oil prices, as more shale oil becomes available to meet the high demand. However, US shale oil production has demonstrated slower-than-expected growth in recent months, largely due to ongoing supply chain disruptions that have hampered efforts to expand output.
In conclusion, the current oil price environment is characterized by a mixture of seemingly bullish factors and ongoing uncertainty about the future direction of demand. While WTI has managed to maintain levels above $80 a barrel, the complex array of factors influencing the market means prices could still be vulnerable to downside risks in the near term.
Going forward, market participants will likely need to keep a close eye on a variety of factors, including the development of the COVID-19 pandemic, geopolitical events such as the Ukraine crisis, and US-Iran negotiations around returning to the nuclear deal. Additionally, any signals of increased oil production by Russia or OPEC+, as well as further US inventory data, will also be crucial to watch for those keeping tabs on the oil market.
