West Texas Intermediate futures topped $111 a barrel while gasoline and diesel prices have rallied to records ahead of the start of the US driving season, which begins in about a week. Crude supplies have been constricted by the boycott of Russian shipments following the invasion of Ukraine, while products markets are showing scarcity as refining capacity fails to keep up with reboundning demand. Money managers have also been boosting their bullish crude bets.
The rise in energy costs has contributed to rampant inflation, prompting central banks to raise rates and stoking investor concern growth will slow. The head of the International Energy Agency and India’s oil minister, speaking at the World Economic Forum in Davos, issued warnings on the risk of high prices.
“We may see prices even going higher, being much more volatile and becoming a major risk for recession for the global economy,” IEA Executive Director Fatih Birol said in an interview with Bloomberg TV from Davos.
His sentiments were echoed by Indian oil and gas minister, Hardeep Singh Puri, who said that several of his country’s neighbors are in “severe dire straits” because of rallying prices. “Let’s make no mistake: oil at $110 a barrel constitutes a challenge for the entire world.”
Oil has surged this year on rising demand and the complex global fallout from Russia’s invasion.
In remarks reported at the weekend, Saudi Arabia signaled it will continue to support Russia’s role in the OPEC+ group of producers, undermining US-led efforts to isolate Moscow for its invasion of Ukraine, the Financial Times said. The kingdom was hoping to work out an agreement with OPEC+ which includes Russia, Energy Minister Prince Abdulaziz bin Salman told the newspaper.
An added lift for crude came from a weakening dollar, which makes the commodity cheaper for holders of other currencies. The greenback was lower on Monday following a drop of 1.4% last week, the most since November 2020.
At the same time, China has imposed a series of painful lockdowns to quell Covid-19 outbreaks, hurting Asia’s largest economy. In Shanghai, officials have laid out the criteria to categorize parts of the commercial hub as low-risk for Covid-19 as they look to end a two-month lockdown, with no new cases outside quarantine being reported. Beijing, however, reported a record number of cases, reviving concern that the capital may face a lockdown.
Oil markets remain in backwardation, a bullish pattern that’s marked by near-term prices trading above longer-dated ones. The difference between WTI’s two nearest December contracts, for this year and in 2023, was near $13 a barrel, up from about $11 a barrel a month ago.
Still, oil may have a ceiling of about $110 a barrel given China’s flagging demand, with economic growth reeling from Beijing’s efforts to stamp out Covid-19, according to an outlook from Bloomberg Intelligence. Bloomberg Economics has cut its full-year China growth forecast to 2% from 5.7%.