Oil prices surged nearly 2% on Friday, marking a fourth consecutive weekly gain as mounting evidence of supply shortages and escalating tensions between Russia and Ukraine intensified concerns in the global oil market.

According to Reuters, Brent crude futures climbed $1.43, equivalent to 1.8%, settling at an impressive $81.07 per barrel, with a weekly gain of around 1.2%. In tandem, U.S. West Texas Intermediate (WTI) crude surged $1.42, or 1.9%, closing at $77.07 per barrel, reaching its highest point since April 25. Throughout the week, WTI saw a notable increase of almost 2%.

Industry analysts have pointed out that the oil market is gradually factoring in a potential supply crunch, and this sentiment is expected to gain momentum in the coming weeks. “Global supplies are starting to tighten, and that could accelerate dramatically,” commented Phil Flynn, an analyst from Price Futures Group. He also emphasized that rising geopolitical tensions pose an additional risk, potentially further impacting oil prices.

The ongoing hostilities between Russia and Ukraine have taken a toll on international relations and raised concerns about potential disruptions to oil supplies. In the latest development, Russia has been targeting Ukrainian food export facilities for four consecutive days, while also practicing ship seizures in the Black Sea. These actions have heightened tensions in the region following Moscow’s recent withdrawal from a U.N.-brokered safe sea corridor agreement.

The situation has raised concerns about the flow of goods and oil exports in the area, particularly considering the importance of the Black Sea as a crucial route for international trade. The Kremlin highlighted the potential danger to civilian shipping in the Black Sea, adding that the situation around Russian exports demands a careful analysis.

Furthermore, in the United States, crude inventories fell during the last week, attributed to an increase in crude exports and higher refinery utilization, as reported by the Energy Information Administration (EIA) on Wednesday. Earlier forecasts by the EIA also indicated that U.S. shale oil and gas production was likely to decline in August for the first time this year, amplifying concerns over supply tightness.

The domestic energy sector in the U.S. has been undergoing adjustments in response to market conditions. This week saw U.S. energy firms reducing the number of oil rigs by seven, representing the most significant reduction since early June, according to energy services firm Baker Hughes. At a current count of 530, the number of U.S. oil rigs stands at its lowest level since March 2022, which could potentially impact future oil output.

Amidst the concerns over supply constraints, investors welcomed China’s stimulus measures aimed at bolstering sales of automobiles and electronics. The government’s move was seen as a positive step towards reinvigorating the country’s sluggish economy, which also bodes well for the oil market.

Looking ahead, analysts are closely monitoring preliminary purchasing manager surveys from S&P Global next week, as they are expected to offer critical insights into the evolving global demand dynamics.

The oil market is undoubtedly navigating a period of uncertainty, with supply constraints and geopolitical tensions adding complexity to an already intricate landscape. Investors and industry experts alike will be keenly observing developments in the coming weeks to ascertain how these factors might shape the future trajectory of oil prices and market stability.

By: Montel Kamau Serrari Financial Analyst 22nd July, 2023

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