Oil Ends Week On 3% High As Traders React To Global Supply Tightening

But the bullish sentiment in the face of rate hikes may be fleeting: File Image/Pixabay

Crude traders on Friday ended the week more decisively than usual by causing oil prices to climb  almost 3 percent to a nine-week high, finally focusing on what analysts have been concerned about for weeks: that global supply is tightening.

Brent settled up $1.95, or 2.6 percent, to $78.47 per barrel, the highest close since May 1; West Texas Intermediate settled up $2.06, or 2.9 percent, to $73.86, the highest close since May 24.

Both benchmarks rose about 5 percent for the week.

Analysts at U.S. based Morningstar said in a note that "OPEC+ production cuts are expected to tighten the market, driving supply deficits in the second half of 2023, supporting higher oil prices."

The total reductions from Organization of the Petroleum Exporting Countries and its allies in the near term will be about 5 million barrels per day (bpd), or 5 percent of global demand.

Also, Vortexa said that crude from Saudi Arabia in floating storage off the Egyptian Red Sea port of Ain Sukhna is down by almost half from mid-June, to 10.5 million barrels.

These signs of tightness followed an earlier report by John Kemp, commodities analyst for Reuters, who noted that the decline in prices and drilling rates since late 2022 are "set to reduce output in the second half of 2023 and tighten markets for both oil and gas later this year and into 2024."

An upbeat Phil Flynn, senior market analyst at Price Futures Groups Inc., said of Friday's trading, "We're knocking on the door of a major breakout to the upside; I think you're seeing some short covering here today ... because a lot of people have been betting on the short side."

Still, given the long bearish run caused by fears over more interest rate hikes by central banks, it's not inconceivable that sentiment could pivot instantly back to that issue, especially in the wake of data released Friday showing that while American job gains slowed last month wage growth remained strong: a recipe that will surely help motivate the U.S. Federal Reserve to take action.

More news that could be construed as worrisome was data published on Friday by Baker Hughes showing that the total number of total active drilling rigs in the U.S. rose by 6 this week, after falling by 8 last week, to 680; and while the number of oil rigs declined by 5 this week to 540, the number of gas rigs rose by 11, to 135.

Overall, crude remains down about 10 percent this year due to the rate hikes, disappointment over China's post lockdown economic recovery, and resilient exports from Russia despite sanctions against the former Soviet Union.