Oil Prices Slightly Increased Last Week

In global markets, oil prices slightly increased last week due to a weakening supply from Russia, while a larger price increase is hindered by weakening demand due to the slowdown in growth of the largest world economies.

The price of a barrel on the London market rose by 0.5 percent last week to $107.14, while on the American market, a barrel increased by 2.6 percent to $104.69.

The rise in prices is supported by fears of further supply disruptions from Russia due to the war in Ukraine. There is an increasing likelihood that Germany will join EU members advocating an embargo on Russian oil, which would mean an even weaker supply in an already poorly supplied global oil market.

Russian production could fall by 17 percent this year, writes Reuters, as Western sanctions against Russia due to its invasion of Ukraine have harmed investments and exports.

On the other hand, the Organization of the Petroleum Exporting Countries (OPEC) is likely to stick to its plans for another slight increase in production in June, which will be decided at a meeting on May 5.

Weak Demand

However, demand for ‘black gold’ is also weak due to the slowdown in growth of the largest world economies.

Last week, it was reported that the gross domestic product (GDP) of the United States, the largest world consumer of oil, unexpectedly fell by 0.4 percent in the first quarter compared to the previous quarter, marking the first decline in the economy since the short but deep recession during the COVID crisis nearly two years ago.

Given that the U.S. central bank will aggressively raise interest rates due to high inflation, further slowdown of the largest world economy is expected.

Investors are also concerned about the slowdown in China’s economy as Shanghai and some other cities have been ‘closed’ for weeks due to the spread of the coronavirus, and more schools and public institutions in Beijing are also being ‘closed’.

Restrictive measures, in line with the ‘zero tolerance’ COVID policy, will further slow the already sluggish growth of the world’s second-largest economy and disrupt supply chains.

– Since March, there has been frequent recourse to complete or partial ‘lockdowns’, and Chinese economic indicators have plunged even deeper into negative territory. We expect further slowdown of China’s GDP in the second quarter. Oil prices will fluctuate in the market in the upcoming period due to the possible extended and prolonged ‘lockdown’ in May and the following months, so in the short term, the risks of weakening Chinese demand for oil – and prices – prevail, says Yanting Zhou from Wood Mackenzie in a review of the market situation.

Some analysts note that concerns about Chinese demand could be overshadowed by buyers from Europe.

– If Europe is unexpectedly forced to seek huge quantities of gas or oil in international markets, this will mitigate fears of a Chinese slowdown and raise prices, explains Jeffrey Halley from OANDA.

However, due to the expected rise in interest rates in the U.S., the value of the dollar against a basket of the most important world currencies has reached its highest levels in 20 years. This makes oil more expensive for countries with other currencies, leading to a weakening of demand.

After rising more than 50 percent last year, thanks to the recovery of the global economy from the COVID crisis, oil prices have jumped more than 35 percent since the beginning of this year.

However, most analysts expect prices to ease in the upcoming period. According to the latest Reuters survey, analysts estimate that the average price of oil this year will be slightly below $100 per barrel due to the slowdown in global economic growth.