Why oil prices are on their strongest run since before Russia invaded Ukraine

Worldwide oil prices have increased by over 16% since the end of June and are on track for their fifth consecutive week of growth. This ongoing rally is the longest since before Russia's complete invasion of Ukraine, which greatly disrupted the energy markets.

The cost of Brent crude, the international standard, decreased by 0.1% to $84 per barrel on Friday, yet remains 3.9% higher than last week. This winning period is the lengthiest since concluding an eight-week surge in early February 2022.

Oil prices in the United States are expected to experience a 3.9% increase this week, marking the longest winning streak since April 2022. As a result, gasoline prices in the US have surged, reaching an average of $3.73 per gallon on Friday. This is the highest price recorded since mid-November 2022.

Concerns about a worldwide economic downturn have been circulating for a while, and an underwhelming economic bounce-back in China had dimmed expectations for the need for energy. Hence, the question arises: what is causing the rise in oil prices?

The International Energy Agency predicts that there will be a noticeable increase in worldwide oil consumption, reaching a historic high of 102 million barrels per day. However, the agency also highlights that global oil production is expected to rise, but at a slower rate of 1.5 million barrels per day, resulting in a total production of 101.5 million barrels per day.

The shortage in supply has been worsened by the reduction in production by OPEC+, a coalition of the prominent global manufacturers.

The collective, consisting of OPEC, Russia, and additional minor producers, made a commitment in April to reduce production by over 1.6 million barrels per day until the year's end. This decision was taken in reaction to a significant decline of nearly 38% in oil prices from their highest point in the previous year.

According to Giovanni Staunovo, an investment bank strategist at UBS, the recent increase in price has mainly been influenced by the deliberate reduction in production announced by OPEC+.

Staunovo stated that the supplementary voluntary reductions disclosed by Saudi Arabia - the largest global distributor of unprocessed petroleum - earlier this month, will enhance the tightening of the oil market.

Riyadh has declared its intention to prolong a reduction in production by one million barrels per day, extending it until at least the conclusion of August. Originally, this cut was set to be in effect only for the month of July. Additionally, the Gulf state has decided to extend a production decrease of 500,000 barrels per day, which was initially revealed in April, until the end of the following year.

Combined, the reductions will result in Saudi Arabia producing only nine million barrels of oil per day.

Markets are additionally reevaluating their bleak predictions concerning oil consumption.

Several major global economies are disregarding cautionary signs of a decline, despite continued inflation and the implementation of challenging interest rate increases. Oil traders are confident that these resilient economies will reflect strong demand, and they believe that as interest rates approach their maximum level, there is potential for an enhanced growth perspective.

The economy of the United States expanded by 2.4% during the second quarter. This growth rate surpassed the speed observed in the initial three months of the year and also exceeded the predictions made by economists, who had anticipated a growth rate of 1.8%, as reported by Refinitiv.

Additionally, Europe is showing some promising indications. The group of 20 nations that use the euro currency experienced a decline in economic activity at the beginning of this year. However, recent information from France, Spain, and Germany indicates that this downturn may have already come to an end.

According to a research note from Berenberg bank, the eurozone economy might have grown slightly quicker in the second quarter of 2023 compared to what we had previously predicted, thanks to a recovery in Spanish consumer spending and a temporary increase in French exports.

The French economy experienced a 0.5% growth in the second quarter of the present year, surpassing the predictions of economists. On the other hand, Germany, the biggest economy in Europe, remained at a standstill. Nonetheless, this can be seen as a slight enhancement compared to the consecutive declines witnessed in the previous two quarters.

According to Edward Gardner, a commodities economist at Capital Economics, the surge in oil prices was primarily propelled by the production cuts carried out by OPEC+. Additionally, the increase was also aided by the strong and unwavering demand in developed market economies.

According to Gardner, the global oil market is predicted to shift from having an excess supply of 800,000 barrels per day in the first six months of the year to a shortage of 1.2 million barrels per day in the latter half.

The largest importer of oil globally could potentially be adding to the increasing costs.

After China abandoned its rigorous zero-Covid approach in December, several individuals were optimistic about witnessing a robust recovery in the global economy's second-largest powerhouse. Unfortunately, this anticipation did not turn into reality, ultimately impacting oil prices during the initial months of this year.

According to a report released on Monday to state media, the highest governing body of China referred to the economic recovery as a challenging and difficult process. However, during a meeting led by President Xi Jinping, the Politburo of the Communist Party announced plans to make changes in their policies. These changes are aimed at boosting domestic spending, supporting private enterprises, and strengthening the troubled real estate industry.

The information shared was not very elaborate. Nevertheless, the announcement of a potential financial aid program from the government has greatly improved the state of China's struggling real estate industry. The stocks of Country Garden, which happens to be China's top-selling property developer in the previous year, have experienced a remarkable 34% surge following this news.