In May, the high range of oil price fluctuated under the game between the expectation of supply tightening and the economic downside risk brought by the Fed’s interest rate hike to the market. According to the monitoring of business agency, WTI crude oil rose by 9.53% and Brent crude oil rose by 7.90% on a monthly basis.
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At the end of the month, crude oil started upward again. On May 30, Brent oil price broke through $120, hitting a new high in nearly three months. The main reason is that the European Union once again held consultations on the Russian oil embargo, which further exacerbated the expectation of tight supply. At the same time, the arrival of the peak driving season in North America in summer, as well as the improvement of the epidemic situation in China, and the gradual relaxation of restrictive measures, have also enhanced the prospects for demand recovery.
Where will the oil price go when it reaches a relative high?
Tight remote supply Russian oil supply will continue to decline
The European Union has implemented the sixth round of sanctions against Russia. This time, it still focuses on the issue of Russian oil embargo. On May 30, Charles Michel, President of the European Council, said on social media that the EU had reached a consensus on the implementation of the oil embargo against Russia, which “will immediately cover two-thirds of the oil imported by the EU from Russia”, aiming to cut off Russia’s huge energy income to exert pressure. Once the news was released, the oil price quickly rose above $120. However, it is still necessary to observe the implementation of the agreement in the later stage, especially the different voices within the EU, including Hungary, and some member states’ heavy dependence on Russian crude oil. The real implementation of the agreement remains to be verified. In particular, the details of this Agreement have also exposed some problems. For example, it is mainly aimed at maritime transportation, while pipeline transportation is exempted. On the whole, however, Russian oil exports will still have an impact in the future.
It is difficult for OPEC and its allies (opec+) to bring about supply increase
Despite the hope that it has been calling for opec+ to increase production, its recent position is still negative for increasing production. Oepc+ will hold a meeting on Thursday (June 2). The previous rumors have continued the tightening of supply and supported the oil price. According to sources, they will maintain the current moderate production increase plan and increase production by 430000 barrels per day in July. In addition, with the gradual increase of opec+ production, some oil producing countries cannot complete the production increase quota, and the output that can be released in the future is also very limited. This will be good for oil supply in the medium and long term.
European and American driving season starts & China’s restrictive measures are gradually lifted, and the demand is significantly boosted
Traditionally, the peak driving season in the United States begins on Memorial Day at the end of May and ends on Labor Day in September. Although some people worry that soaring fuel prices may weaken demand, there are now signs that although gasoline prices in the United States continue to rise, they have not affected American people’s driving. According to gasbuddy, gasoline demand in the United States on Saturday and Sunday increased by 0.5% over the previous week, 1.2% higher than the average level in the past four weeks. According to the latest data from the American Automobile Association, as of Monday, the average retail price of gasoline in the United States had reached $4.619 per gallon. This level is higher than $4.178 a month ago and about 52% higher than a year ago. The US driving season and strong travel demand are expected to boost oil prices. As supply growth lags behind demand growth, the oil market may continue to show that demand exceeds supply. Therefore, the medium-term oil price will remain optimistic.
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In addition, with the gradual improvement of the epidemic situation in China, restrictive measures have been lifted in various places, including the gradual resumption of work and production in Shanghai. The pent up demand has been released to a certain extent. Oil demand in Asia will resume growth.
The fall of US dollar index drives up the oil price valuation
At the macro level, the pressure from inflation in Europe and the United States will continue in the future. The CPI of the United States rose by 8.3% year-on-year in April, showing a marginal peak. Pressure from the Federal Reserve to raise interest rates aggressively has eased slightly. At the same time, the fall of the US dollar index also fully illustrates this point. As of May 30, the US dollar index fell for two weeks, hitting a new low of 101.26 in more than a month, indicating that the pressure on the US dollar to return has been reduced. At the same time, the expectation of the Federal Reserve to slow down and tighten policy has also led to higher market investment risk appetite. While the stock market rebounded, oil prices were also pulled higher.
Outlook
According to the crude oil analysts of the business agency, in the short term, the supply and demand of crude oil are all positive, and the oil price will face increasing pressure for upward breakthrough in the future. In the medium and long term, the EU’s oil embargo against Russia is gradually advancing, and crude oil is still facing the risk of supply shortage. However, there are also some variables on the demand side, especially after the end of the driving season in Europe and the United States, when the inflation pressure is still difficult to ease, the process of the Federal Reserve raising interest rates will suppress demand. On the whole, the supply and demand of crude oil will remain in tight balance in the future. With regard to oil prices, there has been peak pressure in the near future, but it is still an upward trend in the long run.
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