Oil Heads for 2% Weekly Gain on Tight U.S. Supply and Strong Chinese Demand

Introduction

The world of oil trading is always in motion, reacting to a multitude of factors that influence the supply and demand dynamics. In recent days, the spotlight has turned to the oil market once again, as it heads for a 2% weekly gain. This surge in oil prices is primarily attributed to two key factors: limited U.S. supply and robust Chinese demand. In this article, we will delve into the details of these developments and their implications for the global oil market.

U.S. Supply Constraints

A Record-Breaking Run

The surge in oil prices began with front-month Brent November futures gaining 42 cents, or 0.44%, reaching $95.80 per barrel. Simultaneously, the more liquid Brent December contract increased by 33 cents, or 0.35%, settling at $93.43 per barrel. On the other side of the Atlantic, West Texas Intermediate (WTI) crude for the United States saw an increase of 51 cents or 0.56%, reaching $92.22 a barrel. These numbers alone tell a story of increasing oil prices.

Historical Highs

On a noteworthy Thursday, Brent futures reached an intraday high of $97.69 per barrel, breaking their previous record set in November 2022. WTI, in the same breath, reached $95.03 a barrel, marking its highest intra-day price since August of last year. These milestones are captivating for investors, but what’s causing this remarkable price rally?

Supply Bottlenecks

Behind these record-breaking figures lies a significant factor: supply bottlenecks. Storage at Cushing, Oklahoma, the delivery point for U.S. oil futures, is at its lowest level since July 2022. This backdrop of constrained supply in the U.S. has further bolstered oil prices. Carsten Fritsch, an analyst at Commerzbank (ETR: CBKG), notes that “any further decline would threaten to bring them down to a critical level, which could make further withdrawals difficult.” This precarious situation adds an element of uncertainty to the oil market.

Chinese Demand Surge

Golden Week Vacation

On the other side of the equation, China’s petroleum demand is on the rise, driven by the week-long Golden Week vacation. This holiday is a time when Chinese citizens travel both domestically and internationally, spurring an uptick in fuel consumption.

Overseas Travel Boost

ANZ analysts’ client note points out that Chinese oil demand is being boosted by an increase in overseas travel over the Golden Week holiday. Data from the Ume trip flying app reveals that the average number of daily flights booked is a fifth more than during Golden Week in 2019, prior to COVID-19. This suggests that not only domestic but also international travel is contributing to the surge in oil demand.

Global Economic Factors

Eurozone Inflation

Shifting our focus to global economic factors, it’s essential to consider the Eurozone’s economic landscape. The most recent Eurostat flash report revealed that inflation in the eurozone dropped to a two-year low of 4.3% in September. This decrease indicates that the European Central Bank’s policy of gradual interest rate increases is having an impact on inflation. It’s a reminder that oil prices are interconnected with the broader economic context.

Future Considerations

Export Restrictions

As the situation unfolds, there is a possibility that Russia might consider implementing gasoline export limitations if the present export restrictions fail to lower domestic costs. Alexander Novak, deputy prime minister of Russia, has indicated that strong regulatory measures would be implemented if the situation does not improve. This development could have implications for global oil markets, potentially adding more complexity to the supply-demand equation.

Conclusion

In conclusion, the oil market is currently witnessing a 2% weekly gain, driven by limited U.S. supply and strong Chinese demand during the Golden Week vacation. However, uncertainties remain, especially with supply bottlenecks and potential export restrictions on the horizon. The global oil market continues to be influenced by a delicate balance of supply and demand dynamics, as well as broader economic factors.