Shrinking Supply Buoys Oil Prices, But Demand Destruction Is Beginning

Meanwhile, the U.K. imposes a 25% windfall tax to aid poor homeowners: File Image/Pixabay

Stock declines coupled with a broader market rally resulted in another increase for oil prices on Thursday, but worse than expected economic fallout due to China's zero-Covid lockdowns capped gains.

News from the previous session that U.S. gasoline stockpiles declined to the lowest seasonal level since 2014 caused West Texas Intermediate to settle up $3.76 at $114.09 per barrel, while Brent settled up $3.37 at $117.40 per barrel.

Dennis Kissler, senior vice president of trading at BOK Financial, said, "The realization is setting in that supplies are going to continue to contract, that's what's pushing crude higher."

Indeed, the gap between prices for WTI available immediately versus those a month later widened to almost $3 per barrel, and Brent's equivalent spread climbing to as much as $3.20 on Thursday, the highest since late March.

Tightness is proving to be a windfall for some, case in point: Saudi Arabia, which on Thursday reported that its oil exports reached $30 billion in March, the highest in at least six years.

The kingdom's crude production rose to 10.3 million barrels per day in March with Brent averaging $112 per barrel, and this helped achieve a $15 billion budget surplus between January and March – one of the fastest-growing large economies in the world this year, according to the International Monetary Fund.

However, overall the tightness and high prices remain a huge concern: in the U.S. the Energy Information Administration noted that motor fuel demand is showing some signs of stress and tumbling on a rolling four-week basis; meanwhile, prices in the U.K. have become so burdensome that the British government announced a 25 percent tax on oil and gas firms, which is expected to raise about $6.3 billion and will finance grants to the poorest households in the nation.

Rishi Sunak, chancellor of the exchequer, also didn't rule out applying a similar levy to power generators, but pushback has predictably been intense, with former Tory cabinet minister David Davis warning  that a windfall tax "will raise a small amount of money" and that "stability of tax and low tax both encourage investment and growth."

The problems facing China, by contrast, are largely of its own doing: Li Keqiang, premier of China, told media that his country's economy is faring worse in some ways than in 2020 when the pandemic first emerged, and he called for efforts to reduce a soaring unemployment rate caused by brutal lockdowns that have all but ground major cities to a halt.

As for upcoming market prospects, Tamas Varga, analyst at PVM Oil Associates, said, "The fundamental backdrop ... is getting price supportive as the driving season is approaching and will turn even more bullish once the European Union sanctions on Russian oil sales are endorsed by all parties involved."

For his part, EU president Charles Michel said he was confident an agreement can be reached before the council's next meeting on May 30.