Oil prices rallied over 2%, reaching a three-month peak on Monday, bolstered by tightening supply, surging U.S. gasoline demand, optimistic expectations of Chinese stimulus actions, and technical buying.
In addition to these factors, market uncertainty stemming from Russia’s attacks on Ukraine’s grain export facilities and North Korea’s multiple missile launches was noted as contributing to the price surge.
Despite expectations of further interest rate hikes by U.S. and European central banks, the price hike persisted. Higher interest rates usually increase borrowing costs and can potentially dampen economic growth and decrease oil demand.
By 11:56 a.m. EDT (1556 GMT), Brent futures surged $1.82, equivalent to 2.2%, to hit $82.89 per barrel, while U.S. West Texas Intermediate (WTI) crude rose by $1.96, or 2.5%, reaching $79.03 per barrel.
This upward trajectory set both benchmarks on track for their highest closing prices since April 19, pushing both contracts into technically overbought territory. WTI futures were also expected to close above the 200-day moving average, a significant technical resistance point since August 2022.
Bob Yawger, Mizuho’s Director of Energy Futures, explained that a close above the 200-day moving average usually prompts a halt in speculative shorts and attracts traders seeking new entry points.
The climb in both crude benchmarks over the past four weeks was fueled by the anticipation of supply tightening due to production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+.
Citi Research attributed oil’s rise to “tightening conditions as Saudi oil output cuts impact the market… even as summer demand has been somewhat stronger for gasoline and jet fuel.”
The increase in demand also propelled U.S. gasoline futures to their highest level since October 2022, leading the gasoline crack spread, a measure of refining profit margins, to reach its peak since July 2022.
However, on the demand side, there were concerns about Eurozone business activity shrinking more than expected in July, with a decline in the dominant services industry and factory output experiencing its sharpest contraction since the onset of the COVID-19 pandemic.
Investors had factored in quarter-point rate hikes from both the U.S. Federal Reserve and the European Central Bank (ECB) in the current week, with particular interest in the statements of Fed Chair Jerome Powell and ECB President Christine Lagarde regarding future rate increases.
Analysts from National Australian Bank predicted that despite short-term price volatility caused by another Fed rate hike, tightening market conditions due to OPEC’s supply cuts and growing market speculation of further stimulus in China would likely continue pushing prices higher throughout the third quarter of 2023.
While most economists polled by Reuters expected this to be the last increase in the current tightening cycle, signs of disinflation this month have eliminated the need for the Fed to implement further rate hikes.
China, the world’s second-largest economy and oil consumer, pledged to provide increased policy support for its economy, focusing on boosting domestic demand, and indicating additional stimulus measures during the challenging post-COVID recovery phase.
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