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Oil prices are rising as China emerges from its trade embargo, putting upward demand pressure on the commodity

The market factored in increasing demand from China, the world’s largest petroleum importer, which is now lifting Covid-19 limits, as oil prices continued their bull run in early trade on Monday.

At 6.50 a.m. UAE time, Brent, the worldwide benchmark for two-thirds of the world’s oil, was up 0.81 percent to $120.70 a barrel. The benchmark for US crude, West Texas Intermediate, rose 0.85% to $119.90 per barrel, the highest level in in three months.
As Western economies recover from the coronavirus pandemic, Russia’s military offensive enters its fourth month, and the EU moves closer to banning most Russian oil imports by the end of the year, both benchmarks are up more than 70% since last year.

As the US and Europe enter the summer season, prices are also rising as the oil market remains tight due to supply constraints and increased demand.

“While China’s Covid restrictions are being loosened and Saudi Arabia’s selling prices to Asia and Europe are rising, possible Venezuelan shipments to Europe are running into temporary opposition,” said Jeffrey Halley, a senior market analyst at Oanda.

According to Bloomberg, Saudi Aramco hiked its rates for Asian customers by $2.10 a barrel in June, to $6.50 above the benchmark it uses, ahead of a $1.50 increase forecast by the market. According to the news agency, Aramco also raised its pricing for northwestern Europe and the Mediterranean.

The rise in oil prices has worsened worldwide inflationary pressures, prompting the International Monetary Fund, World Bank, and Institute of International Finance to lower their global economic estimates for this year. Rising interest rates and a European energy shortage have fueled concerns that developed countries may enter a recession.

The 23-member Opec production group agreed last week to increase output by almost 50% in July and August, to 648,000 barrels per day.

This will deliver an additional 216,000 barrels per day to the market, on top of the 432,000 barrels per day that will be available next month. The increment will be distributed proportionally among alliance members. Last week, oil prices increased by more than 3%.

“Oil prices rose upward last week as the Opec+ plan to accelerate some of the return of its production failed to satisfy markets,” Emirates NBD economists wrote in a research note on Monday.

Saudi Arabia, the world’s largest oil exporter, as well as the United Arab Emirates and Iraq, are among the Opec countries with the ability to increase output.

The kingdom’s production capacity is 12 million bpd, up from 10.4 million bpd in April and 10.3 million bpd in March.

About 11.9 million barrels per day (bpd) of crude oil are produced in the United States. According to the most recent statistics from the Energy Information Administration, US oil stocks declined by around 5.1 million barrels to 414.7 million barrels on Thursday, much below the five-year average.

“We believe markets are on the verge of a time of evident and continuous demand destruction,” said Ehsan Khoman, MUFG Bank’s director of developing markets research for Europe, the Middle East, and Africa. We believe markets are now moving towards a time of evident and persistent demand destruction, given the sheer velocity of the supply shock, which comes after two years of slowly lowering stocks, he added.

Brent will reach a high of $141 per barrel in the third quarter of this year, according to MUFG, before falling to an average of $112 per barrel in the fourth quarter of 2022.

Mr Halley explained, “Regardless of how you look at it, both Brent and WTI prices are reaching post-Ukraine highs, stripped at the days of the initial clashes.”

“If Venezuelan and Libyan supply is returned to Europe and North America, it will not be sufficient to lower prices in the medium term. The refining surplus in refined products is boosting oil prices, according to refinery margins around the world. Demand for gasoline and diesel remains high.”