Oil posts fourth weekly gain as IEA raises 2023 global oil demand estimates

Weaker dollar is also supporting crude prices as they edge higher

A pump jack sits at an oil well along Interstate 25 near Dacono, Colorado. AP

Oil prices registered their fourth weekly gain on signs of a tightening global market following Opec+ production cuts, a weaker dollar, and as the International Energy Agency raised its 2023 global oil demand estimates.

Brent, the benchmark for two thirds of the world’s oil, settled 0.26 per cent higher at $86.31 a barrel at the close of trading on Friday, while West Texas Intermediate, the gauge that tracks US crude, was up 0.44 per cent at $82.52 a barrel.

In its monthly report issued on Friday, the IEA projected global oil demand will rise by two million barrels per day to a record 101.9 million bpd this year as China, the world's biggest crude importer, reopens its economy after about three years of adhering to a strict zero-Covid policy.

On Thursday, Opec stuck to its 2023 growth projection for oil demand in its monthly oil report despite lowering its forecast in North America and Europe amid a slowing global economy.

The oil producers' group said better crude demand in Organisation for Economic Co-operation and Development (OECD) countries, led by China, was balancing out the market.

Last week Opec+ producers announced they would make voluntary oil production cuts of 1.16 million barrels per day from May until the end of this year as a precautionary measure aimed at supporting the stability of the oil market.

Russia, which is part of the 23-member alliance of producers, also said the 500,000 bpd cut it is making from March to June would continue until the end of the year, taking the group's output cut to more than 1.66 million bpd by the end of 2023, in addition to the 2 million bpd cut made at the end of last year.

Opec expects crude demand to grow by 2.3 million bpd this year to 101.89 million bpd.

However, that assessment is “subject to many uncertainties”, including the “trend and pace of economic activity” in OECD and non-OECD countries, Opec said in its monthly oil market report.

A weaker dollar, which makes oil cheaper for holders of other currencies, is also supporting demand for crude.

The US Dollar Index, a measure of the value of the greenback against a weighted basket of major currencies, was down 0.17 per cent at 100.84.

Oil prices have shifted course after declining last month after a banking crisis in the US, which led to the collapse of three lenders, rattled markets and raised recession fears.

The output cut by Opec+ and the reopening of the China, the world's second-largest economy, have buttressed prices.

A lack of investment in oil production around the world as well as the elevated market share of the Opec+ countries and inelastic demand, has given Opec the ability to put a floor under prices, Goldman Sachs energy economist Daan Struyven said in a recent report.

If oil demand is strong, Opec can increase production, but if demand is soft, it can keep production restrained and limit the downside for prices, he said.

According to the US investment bank the cut in oil output will likely increase Saudi Arabia and Opec+ oil revenues. Goldman Sachs estimates that a 7 per cent boost in oil prices because of this cut and the modest reduction in production costs, will more than offset the losses from Opec+ selling less oil.

“Following the shock Opec+ cut announcement … crude oil is now trading at the highest level this year, trying to now break above its 200-day moving average — last seen in August 2022,” said Ehsan Khoman, head of emerging markets research for Europe, the Middle East and Africa at MUFG Bank, Japan's largest lender.

“It’s a tug-of-war of where oil prices go next. On the one hand is the bullish narrative that supply scarcity driven by a tight market due to stern Opec+ cuts, negligible US shale output and China reopening trade will drive prices higher," Mr Khoman said.

“On the other hand is the bearish perspective on Fed angst and hard landing concerns.”

The US Federal Reserve has been aggressively raising rates, with more increases expected as it aims to bring inflation down from 40-year highs, which were reached last year, to its target range of 2 per cent.

The Fed increased the policy rate by 25 basis points last month, the ninth rate increase by the US central bank since it started monetary tightening in March 2022, pushing rates in the US to their highest since 2007, shortly before the start of the 2008 financial crisis.

Inflation in the US slowed to 5 per cent on an annual basis in March, the ninth straight monthly decline after peaking at 9.1 per cent in June 2022.

As the March headline inflation reading was well above the Fed's 2 per cent target, the US central bank is expected to raise interest rates by another 25 basis points at its next meeting on May 2 and May 3.

"The risk of a couple million-barrel deficit in the second half of the year should keep prices supported regardless of whatever noise emerges from the Fed contemplating another quarter-point or so in rate hikes," said Edward Moya, a senior market analyst at Oanda.

"Energy traders should feel confident this market will remain tight."