Crude prices are likely to attempt a return to the Ukraine-invasion highs of March as the European Union moves forward with a ban on most Russian oil products and as China ends its more than two-month-long lockdown of its Shanghai business hub.
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Gold, meanwhile, could be locked in its most recent $1,850-$1,830-an-ounce range as the Dollar Index fights to hold above the key 100-point level and bond yields tied to the US 10-year Treasury note head for its first weekly gain in four.
After more than two months of back and forth, the EU agreed to slash oil imports from Russia by the end of 2022, fuelling worries of a tighter market already strained for supply amid rising demand ahead of peak US and European summer driving season.
European Union leaders agreed in principle to cut 90% of oil imports from Russia by the end of 2022, resolving a deadlock with Hungary over the bloc's toughest sanction yet on Moscow since the invasion of Ukraine three months ago.
In Tuesday’s Asian trading, London-traded Brent, the global benchmark for crude, was up $1.63, or 1.4%, to $119.23 for a barrel meant for August delivery by 12:35 PM in Singapore (12:35 AM New York). The July contract for Brent, which expired on Monday, settled overnight at $121.67.
New York-traded West Texas Intermediate, the benchmark for US crude, rose by $1.36, or 1.2%, to $118.54 for its July delivery contract.
Both the benchmarks are set to close up for a six straight month, with Brent up 9% for May alone while WTI shows a gain of 13% for the month.
Brent hit 14-year highs of just above $139 on Mar. 7, some two weeks after Russia’s invasion of Ukraine set a raft of Western sanctions against Moscow’s energy and other exports. WTI reprised its own 2008 high the same day, reaching just above $130.
Analysts believe those peaks might be in sight again in the coming days when oil markets experience a perfect storm from the supply tightness posed by the EU ban, an anticipated surge in demand from China, and the refusal of oil exporters in the OPEC+ alliance to add meaningfully to supply when they meet later this week.
“The price action by oil this past week has been ominous, suggesting that supplies of refined products are getting worse, and not better,” said Jeffrey Halley, who oversees Asia-Pacific research at online trading platform OANDA.
“The EU oil ban on Russia further complicates that picture and I am wondering how long markets can continue bottom-fishing elsewhere while ignoring oil’s price rise.”
Some experts, however, think that after the breach of $120, gains in oil may be muted as the market had already priced in the EU supply constraints.
Almost every EU member is on board with the ban, suggesting the market was "already pricing in EU self-sanction and significantly less Russian oil flowing to Europe this year," SPI Asset Management Managing Partner Stephen Innes said in comments carried by Reuters. Adding:
"I think the market is pricing in some more Asia demand via China; however, the glaring concerns are the skyrocketing petrol prices at the pump that could lead to some driving season demand destruction."
Demand from China is expected to pick up after the easing of COVID-19 curbs. Shanghai has announced an end to its two-month-long lockdown, and will allow the vast majority of people in China's largest city to leave their homes and drive their cars from Wednesday.
On the production side, OPEC+ is set to stick to last year's deal at its meeting on Thursday, with a modest July output hike by 432,000 barrels per day, six OPEC+ sources said, rebuffing Western calls for a faster increase to lower surging prices.
For more than a year now, Saudi Arabia, which heads the 23-state global oil exporters alliance OPEC+, has ensured that the countries in the group provide less crude than needed by the market in order to maintain optimum prices for a barrel. While the supply crisis was still manageable until the end of last year, the Ukraine invasion and resulting sanctions on Russia led to disruptions of at least 3 million barrels more per day, leaving consuming nations with virtually no breathing space.
Adding to the crisis, the United States is experiencing a severe squeeze in the supply of gasoline, and particularly diesel, from the closure and downsizing of several refineries during the coronavirus pandemic.
US refineries that have stayed in the business are now providing only what they can—or, more accurately, what they desire—without putting any of the money into expanding existing capacity or acquiring the idled plants that can be reopened to provide some measurable relief to consumers. One motivation for the refineries to do that: record profits from the current situation that may be diluted in an expansion. The other is the long turn-around time for any new refinery to deliver a profit.
Bloomberg estimates that more than 1 million barrels per day of US oil refining capacity—or about 5% overall—have shut since the COVID-19 outbreak initially decimated demand for oil in 2020. Outside of the US, capacity has shrunk by 2.13 million additional barrels a day, energy consultancy Turner, Mason & Co says. The bottom line: With no expansion plans on the horizon, the squeeze is only going to get worse.
Also this week, US jobs data for May is scheduled for release on Friday, with economists expecting the economy to have added 320,000 jobs this month, slowing from 428,000 in April. If it comes in any lower, it could have a negative impact on crude prices given the nexus between the labor and oil markets.
Gold longs will also be anxiously watching the jobs numbers, particularly in terms of wage growth and whether unemployment numbers will tick down to 3.5%.
The US economic calendar also features data on private sector hiring, JOLTS job openings, a closely watched indicator of demand in the labor market and weekly figures on initial jobless claims.
ISM data on manufacturing and service sector activity will be in the spotlight amid concerns over the impact of rising prices and supply chain issues. There will also be a report on consumer confidence.
Investors in gold will also get the chance to hear from several Federal Reserve policymakers on the economic outlook in the coming week.
New York Fed President John Williams and St. Louis Fed President James Bullard, a noted hawk, are both due to speak on Wednesday, followed a day later by Cleveland Fed President Loretta Mester.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.