Oil Up As Signs Of Tight Global Supplies Too Intense To Ignore

However, signs of demand destruction are equally compelling: File Image/Pixabay

Proving yet again that there's no rhyme or reason – or predictability – governing crude trading, oil rallied on Monday as traders suddenly chose to act on concern of tight supplies rather than possible demand destruction, which dominated trading last week.

Even though the U.S. Federal Reserve is set to increase interest rates this week to slow economic growth (and thus negatively impact demand), traders responded to reports that some buyers in Asia are paying premiums of over $20 per barrel to secure certain grades, and Brent futures are trading about $5 over the next month's contract – both reflective of how tight the physical market actually is.

As a result, West Texas Intermediate for September delivery rose $2.00 to settle at $96.70 per barrel, and Brent rose $1.95 to settle at $105.15 per barrel.

As if to echo the schizophrenic nature of the trading community, Francisco Blanch, head of global commodities and derivatives research at Bank of America Corp. told clients in a note that "The key macro variable to watch for clues of future commodity price direction is core U.S. inflation: should core surprise to the downside, a less aggressive tightening path could fuel a second round of commodity price inflation in 2023."

But in the same note he added, "Although admittedly the reverse would also be true."

Ed Moya, senior market analyst at Oanda Corp., said, "Crude prices are showing signs of stabilization around the mid-$90s as the oil market still remains tight despite another wave of weakening economic data in the U.S. and Europe…..despite the growing risks of a severe recession, oil should see strong support at the $90 level over the short-term."

Equally hard to determine is the true effect of the international sanctions against Russia.

On one hand, media have reported that the former Soviet Union's economy has hardly been affected at all and that countries such as China and India have maintained its export levels; on the other, data continues to show a steady of erosion of exports.

Case in point: on Monday it was reported that Russia's shipments to buyers have declined for five consecutive weeks, down by 480,000 barrels per day (bpd), or 13 percent, since mid-June.

According to ship tracking data monitored by Bloomberg, shipments to China and India are down by somewhere between 15 percent and almost 40 percent from their post-invasion peak.

Geopolitical events aside, more volatility in crude trading is likely for the foreseeable future as arguments for the concern of demand destruction continue to be made: also on Monday came news from the U.S. auto club AAA, which surveyed 1,002 adults last month and found that 64 percent of Americans adapted their driving or lifestyle habits in response to high fuel prices.

Of these, 88 percent said they drove less, 74 percent said they combined errands, and over half reduced shopping or restaurant visits; the survey also found that many Americans have postponed taking a vacation this year.

Meanwhile, the tight global supply grew less tight by a fraction on Monday when it was announced that Libya boosted oil production to more than 1 million bpd, more than twice its output of recent weeks when fields and export terminals were closed due to a power struggle between two governments.

Oil production was reopened partly due to the government agreeing to overhaul the board of the state owned National Oil Corp. and the appointment of Farhat Bengdara as head of the group.