Supply crunch continues to push Brent upward

The front-month ICE Brent contract has gained $0.38/bbl on the day, to $83.60/bbl at 09.00 GMT.

PHOTO: Black drum barrels of crude oil and the flag of the US on a world map. Getty Images

Upward pressure:

Brent futures continued to move up as tight supply in oil markets and hopes of a stronger Chinese demand outweighed concerns about a downfall in the global economy.

Oil investors are now focusing on the Organization of the Petroleum Exporting Countries (OPEC) and its allies’ monthly joint ministerial monitoring committee meeting next week. The outcomes of the meeting will reveal if the group of oil producers decides to extend voluntary crude oil production cuts into September as well.

Additionally, China’s recent pledge to accelerate economic growth in ten different sectors has spurred hopes in the oil market, with the expectation to see demand growth in the world’s largest crude oil importer.

“The market is more optimistic following China’s Politburo meeting, where there were promises for more support measures for the domestic economy,” said Warren Patterson, ING’s head of commodities research.

Downward pressure:

Brent felt some downward pressure after the US Federal Reserve’s (Fed) Open Market Committee (FOMC) raised interest rates by 0.25 percentage points to 5.25-5.5%.

According to several market analysts, there is still room for another hike. “Minimal changes were made to the post-meeting statement,” said SPI Asset Management’s analyst Stephen Innes. “The statement did not signal a slower pace for rate hikes at future meetings,” he further added.

Monetary tightening measures taken by the US Fed in the recent past have strengthened the US dollar, making it expensive for non-dollar currency holders to buy dollar-denominated commodities such as oil. Further rate hikes could have a negative effect on global oil demand, putting downward pressure on Brent.

By Aparupa Mazumder

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