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Oil prices fell slightly in early trading this morning (Friday) after a sharp tumble from earlier in the week as fears of rising interest rates and worsening economic conditions wiped out some of the gains.
Since last Friday (June 16th) into the early part of this week oil markets rallied as higher Chinese demand and OPEC+ supply cuts lifted prices, despite expected weakness in the global economy and the prospect for further interest rate hikes.
Also supporting crude are the voluntary output cuts implemented in May by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, plus an additional cut by Saudi Arabia in July. Russian Energy Minister Nikolai Shulginov said it was "realistic" to reach oil prices of around $80 per barrel, Russian state news agencies reported. Shulginov also said Russian oil and gas condensate production is expected to fall by around 20 million tonnes (400,000 barrels per day) this year, reiterating Russia's expectations.
In Iran, crude exports and oil output have hit new highs in 2023 despite U.S. sanctions, according to consultants, shipping data and a source familiar with the matter, adding to global supply when other producers are limiting output.
Oil has also gained this week on hopes of growing Chinese demand. China's refinery throughput rose in May to its second-highest total on record and Kuwait Petroleum Corp's CEO expects Chinese demand to keep climbing during the second half.
However, markets were shocked nursing a 4% fall from Thursday after the Bank of England hiked rates by a bigger-than-expected margin, while Federal Reserve Chair Jerome Powell reiterated the central bank’s plan for more rate hikes.
The bigger-than-expected rate hike from the BoE came after data showed British inflation unexpectedly grew through May. The trend is likely to attract more hikes from the central bank, with markets raising their expectations for the BoE’s terminal rate this year.
The U.S. dollar also strengthened on Thursday after the Fed’s Powell and other members of the central bank said that at least two more interest rate hikes were warranted, given high inflation levels in the country.
The comments, coupled with the shock BoE decision, fed into fears that economic conditions will worsen amid rising interest rates, denting oil demand this year. Fed members James Bullard, Ralph Bostic, and Loretta Mester are set to speak later on Friday, and potentially offer more cues on the path of U.S. interest rates.
Markets are widely pricing in an at least 25 basis point hike by the Fed in July.
Concerns over high inflation in the rest of the globe were also pushed up by stronger-than-expected Japanese inflation data, with a core indicator hitting a 42-year high.
This saw oil markets largely disregard data showing a drop in U.S. inventories, coupled with strong fuel demand in the country.
Data on Thursday showed that U.S. crude inventories shrank far more than expected in the week to June 16, while total fuel products supplied hit their highest level since December 2022.
The readings indicated that U.S. fuel demand was heating up in tandem with the travel-heavy summer season, potentially heralding tighter oil supplies in the coming weeks.
This, coupled with lower Saudi Arabian production, could tighten global oil supplies this year. But the notion was largely offset by fears of worsening demand.
So the relentless tug of war between supply constraints and weak global economic data continues to shape oil prices, with more volatility in the months ahead highly likely.
For fuel card users an increase in the region of 2.5 pence per litre can be expected as we head into the final week of June, however based on weak trading over the last few days we may see a fall in fuel prices for the beginning of July.
