Why oil prices are on their strongest run since before Russia invaded Ukraine
Analysis by Anna Cooban, CNN
London (CNN) — Global oil prices have gained more than 16% since late June and are heading for their fifth-straight week of gains, the longest rally since before Russia’s full-scale invasion of Ukraine upended energy markets.
The price of Brent crude, the global benchmark, ticked down 0.1% to $84 a barrel in Friday, but is still up 3.9% this week. The winning streak is the longest since an eight-week rally ended in early February 2022.
US oil prices are also set for a 3.9% gain this week, and have chalked up their longest rally since April 2022. That has spurred a jump in US gasoline prices, which hit an average of $3.73 a gallon on Friday, their highest level since mid-November 2022.
Fears of a global recession have swirled for months, and a lackluster economic recovery in China had dampened prospects for energy demand. So why are oil prices climbing?
Oil output cuts
According to the International Energy Agency, global oil demand is expected to rise by 2.2 million barrels per day to a record 102 million this year. But global oil production is forecast to rise by only 1.5 million barrels per day to 101.5 million, the agency said in a report this month.
That supply gap has been exacerbated by production cuts by OPEC+, an alliance of the world’s major producers.
The group, which includes the Organization of the Petroleum Exporting Countries (OPEC), Russia and other smaller producers — pledged in April to slash output by more than 1.6 million barrels a day through the end of the year — in response to an almost 38% drop in oil prices from their peak last year.
“The recent price uptick has been driven primarily by OPEC+’s voluntary production cuts announced in April,” Giovanni Staunovo, a strategist at investment bank UBS, told CNN.
Staunovo said additional voluntary cuts announced by Saudi Arabia — the world’s biggest exporter of crude oil — earlier this month would further tighten oil markets.
Riyadh said that it would extend a production cut of one million barrels a day at least until the end of August. The cut was initially planned to last for the month of July. The Gulf state will also extend a production cut of 500,000 barrels per day — first announced in April — to the end of next year.
Taken together, the cuts will reduce Saudi Arabia’s total oil output to nine million barrels per day.
Stronger economic data
Markets are also reassessing their gloomy forecasts for oil demand.
Some of the world’s biggest economies are defying warnings of a slowdown despite still-high inflation and painful interest rate hikes. Oil traders are betting that resilient economies will translate into robust demand, and that, with interest rates nearing their peak, the outlook for growth could improve.
The US economy grew by 2.4% in the second quarter. That was a faster pace than in the first three months of the year and was also above economists’ expectations for growth of 1.8%, according to Refinitiv.
There are also some encouraging signs in Europe. The 20 countries sharing the euro currency slipped into a recession earlier this year, but data from France, Spain and Germany suggests that may already be over.
“Helped by a rebound in Spanish private consumption and a one-off boost to French exports, the eurozone economy may have expanded slightly faster in Q2 2023 than the 0.1% [quarter-on-quarter] gain we predicted previously,” economists at Berenberg bank said in a research note.
French GDP grew by 0.5% in the second quarter, compared with the first quarter of this year, beating economists’ expectations. Germany, Europe’s largest economy, stagnated, but that was a modest improvement from the previous two quarters, which had both shown declines.
OPEC+’s production cuts were the main driver behind rising oil prices, but the jump was also “being supported by resilient demand in developed market economies,” Edward Gardner, a commodities economist at Capital Economics, told CNN.
Gardner said that he expects the global oil market to swing from a supply surplus of 800,000 barrels per day in the first half of the year to a deficit of 1.2 million barrels per day in the second half.
China stimulus
The world’s biggest oil importer may also be contributing to rising prices.
When China ditched its strict zero-Covid policy in December, many had hoped for a strong rebound in the world’s second largest economy. That failed to materialize, a factor that weighed on oil prices earlier this year.
China’s top decision making body described the economic recovery as making “tortuous” progress, according to a report issued Monday to state media. But in a meeting chaired by President Xi Jinping, the Communist Party’s Politburo said it would make policy adjustments to spur domestic consumption, help private businesses and bolster the struggling property sector.
They did not provide much detail. Still, promises of a government stimulus package have boosted shares in China’s beleaguered property sector. Shares in Country Garden, China’s biggest developer by sales last year, have risen 34% since the announcement.
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