Oil prices will begin trading next week just below the $120 milestone, with expectations of rebounding demand putting pressure on tight supplies.
There is little to separate trading on either major benchmark, with Brent Crude and WTI Crude priced at $119.70 and $118.90 per barrel respectively.
While prices remain below the $138 per barrel 14-year peak reached in March, they remain historically elevated, after eight years of trading below the century mark.
China’s gradual phasing out of oppressive lockdown measures, including in both its capital Beijing and its biggest financial hub Shanghai, has fuelled demand expectations – which were already elevated with Western economies heading into the summer holiday season.
On the supply side, OPEC+ agreed earlier this week to bring forward production rises to offset Russian output losses, in an attempt to placate US President Joe Biden who is expected to make an ice-breaking visit Saudi Arabia next month.
This follows continued calls from the US for the organisation to ramp up production over recent months falling on deaf ears.
Relations between the US and Saudi Arabia strained in recent years over disagreements about the war in Yemen and the murder of journalist Jamal Khashoggi – which the White House believes was approved by the country’s ruler and crown prince Mohammed bin Salman.
OPEC+ plays political balancing act ahead of expected Biden visit
Biden is desperate to ease record prices at the pumps and tame the cost of living crisis in the US ahead of key mid-term elections in November.
However, OPEC+’s raised targets remain modest, with the world’s most powerful cartel pledging to boost output by 648,000 barrels per day in July and August – representing just 0.7 per cent of global demand.
This is a gentle increase from its previous pledges to increase supplies by 432,000 barrels per day, with OPEC+ persistently missing production targets this year – falling short of April’s targets by a whopping 2.7m barrels per day.
The organisation is wary of triggering potential supply gluts, or offending key ally Russia by easing prices for Western buyers.
It is also lacking the capacity to significantly boost production – with OPEC estimating only 2m barrels of spare capacity in total.
For instance, the world’s largest oil producer, Saudi Arabia, is producing 10.5m barrels per day and has rarely tested sustained production levels above 11m.
OPEC+ have also not excluded Russia from the pledges, even though its output has fallen by around one million barrels per day following Western sanctions on Russia.
Edward Halley, senior markets analyst at OANDA, said: “It is clear which side OPEC’s bread is buttered on and you’d have to say Vladimir Putin is having a good week by his lowly standards. Progress in Eastern Ukraine, OPEC clearly not wanting to upset him, and now a Russian restriction on noble gas exports.”
Meanwhile, US crude stockpiles fell by a more-than-expected 5.1m barrels, according to the latest weekly inventory report from the US – furthering supply concerns.
Russia relies on allies to buy supplies after EU oil ban
The European Union (EU) has finalised its watered-down ban on Russian crude supplies, which would cut its overall consumption of Kremlin-backed oil by 90 per cent by the end of the year, even if exempts pipelined supplies.
The EU has spent €31.9bn on crude supplies from the country since its invasion of Ukraine in February, and remains Gazprom’s biggest customer.
However, the Russia’s Foreign Minister Sergei Lavrov has argued the latest sanctions will have no effect on the country’s oil exports.
Instead, he predicted a big jump in profits from energy shipments this year – with restrictions powering oil prices to historically elevated levels.
He said: “Considering the price level that has been established as a result of the West’s policies, we have suffered no budgetary losses. On the contrary, this year we will significantly increase the profits from the export of our energy resources.”
It is unlikely Russia could reroute all of its lost supplies to other markets, however, the country’s closest allies – such as China, India, and the UAE – have doubled their imports of its oil since the war in Ukraine, according to data from shipping analyst Signal and cited by The Sunday Times.
It revealed China brought in 43 shipments of Russian oil last month, up from 36 in January, while India had purchased 28, up from just two in January.
The UAE saw ten ships with Russian oil arrive on its shores last month, up from just two in January, with the oil-rich kingdom becoming a hub for small oil merchants following Western boycotts.