Oil Incurs Second Weekly Loss As Analysts Differ On Inflation, Demand

Meanwhile, Nigeria says OPEC has little capacity to increase output: File Image/Pixabay

Despite an extraordinarily tight crude market, fear of demand destruction driven by inflation caused oil to incur its first back-to-back weekly loss since April on Friday, with West Texas Intermediate falling 1.7 percent.

However, the losses were reportedly somewhat mitigated by the University of Michigan’s final June reading of longer-term consumer inflation expectations retreating from an initial 14-year high, thus potentially reducing the possibility of steeper interest-rate hikes.

WTI on Friday settled up $3.35, or 3.2 percent, at $107.62, while Brent settled up $3.07, or 2.8 percent, at $113.12 per barrel.

Also, the market remains in backwardation, with Brent’s prompt spread (the difference between its two nearest contracts) being $4.02 per barrel compared with $2.73 a week ago; this reflects a still-strong demand for real-world barrels.

Even more impressive is Middle East Murban crude, which reportedly was in a backwardation of more than $10 over its nearest two months, indicating major supply scarcity.

While many insiders are frustrated by the Organization of the Petroleum Exporting Countries’ (OPEC) refusal to change the dynamic by pumping all-out, Nigeria’s petroleum minister on Friday said the cartel is running out of capacity to pump more crude.

Timipre Sylva in a briefing with reporters said, “Some people believe the prices to be a little bit on the high side and expect us to pump a little bit more, but at this moment there is really little additional capacity; even Saudi Arabia, Russia, of course Russia, [are] out of the market now more or less.”

Sylva added, “At this moment I think the prices are firming up and I don’t think there will be any surprises in OPEC in August.”

Friday found Ed Moya, senior market analyst at Oanda, in a somewhat optimistic mood about crude’s near-term outlook; he remarked, “Wall Street remains optimistic that inflation will improve over the next year, and that is good news for risky assets, especially commodities.”

But Amrita Sen, co-founder and director of research at Energy Aspects Ltd., pointed out on Friday that the recent slump in oil prices won’t cause any immediate relief on inflation, and she went on to say that “The restraint is on refining capacity; we’ve seen crude prices come down but products really haven’t.”

As for demand destruction, Michael Tran, analyst at RBC Capital Markets, said “there are minimal signs” and that “The potential for [U.S.] president Joe Biden’s gasoline tax holiday effectively leads to demand preservation, which comes with the unintended consequence of further drawing down product stockpiles and keeping prices elevated for longer.”

Stephen Brennock, analyst at PVM, put a different spin on crude outlook by saying that while recession fears are currently trumping sentiment, “the consensus remains that the oil market will see high demand and tight supply over the summer months, thereby limiting the downside.”