Oil Prices Gain Traction Despite Warning That Demand Destruction Has Begun

But one analyst argues that consumption metrics are higher now than in 2019: File Image/Pixabay

Despite a warning that demand is starting to be impacted by high prices, oil on Monday rose by over 2 percent as analysts continued to express concern over physical shortages exacerbated by outages in Libya and, potentially, Norway.

Due to the U.S. holiday there was no settlement on Monday, but West Texas Intermediate for August delivery rose 2.1 percent to $110.66 per barrel as of 3:30 p.m. EST; Brent for September settlement rose 1.7 percent to $113.50.

While Libya struggles with political unrest and Norway faces a workers' strike, there has also been tightness in the Middle East as Oman futures surge relative to the Dubai benchmark; and this seemed to eclipse concern over Vitol Group warning over the weekend that surging fuel costs are starting to hurt demand.

Giovanni Staunovo, a commodity analyst at UBS Group, said, "Risk-on sentiment and a stronger dollar have helped to lift prices."

In fact, desperation in the political realm for something to be done about tight supply was expressed on Monday by UK prime minister Boris Johnson, who despite conceding that "There may be some question about quite how much more the Saudis could pump out at this particular moment" told the House of Commons on Monday that Saudi Arabia needs "to produce more oil – no question."

Bloomberg noted that while Saudi Arabia's official data indicates that it can produce as much as 12 million barrels per day (bpd), or about 1.5 million per day more than current levels, the news agency's estimates show its highest monthly average level at 11.6 million per day, reached in early 2020.

Rachel Ziemba, founder of Ziemba Insights, told media on Monday that "We're starting to see some signs of demand destruction, particularly for gasoline, but it's really just off some of the highs of last year, when gasoline prices were much cheaper."

Ziemba went on to note that, "All these consumption metrics we look at are actually still higher now than they were this time in 2019, when gasoline prices were definitely cheaper, when a lot of other goods were cheaper, and when the U.S. economy was also in a fairly robust state."

Also on Monday, Bloomberg reported that Russian cargoes bound for Asia were down by more than 15 percent on both a weekly and four-week average basis from the highs seen at the end of May.

Flows are also edging lower on a four-week rolling average basis: shipments in the four weeks to July 1 averaged 3.46 million bpd, their lowest since the period ending April 15.

Additionally, while China and India is still taking more than half of all the crude shipped from Russia, flows to Asia in the most recent four week period accounted for 52 percent of Russia's total seaborne exports, down from a high of 63 percent in the four weeks to April 15.