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Oil Soars as Inflation Pressure Increases
09.06.2022

On Wednesday 8th June, oil soared to a 13-week high with Brent crude climbing over 2% to $123, and West Texas Intermediate (WTI) to $122 per barrel. Both Goldman Sachs and the Bank of America are predicting that the prices will surpass $140 pb.

This may be seem like good news for the bullish oil investors, but for the rest of the world, its less than ideal. Petrol station prices have already surged to record highs in the US and in Europe, and some economists predict that further price increases could trigger a recession.

Oil prices are mainly influenced by the supply and demand within an economy. In other words, increased supply should bring the price down, while increased demand should bring the price up. However, oil prices continue to soar despite OPEC+ decision to boost production last week. If anything, the prices climbed a further 5% since then.
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Why are oil prices growing?

Oil is a type of asset that is highly susceptible to market conditions, and the past few months have been action-packed with events that have been influencing oil prices.

Last week OPEC+ announced that it would increase oil supplies by 648,000 barrels per day in July and August. This is a significant increase from its previous monthly boosts of roughly 400,000 barrels a day. Normally, this should have sent oil prices downward, but instead the prices continue to rally.

According to some investment managers, the reason behind the prices continuing to rally is that there’s a lot of doubt as to whether the oil-producing countries will be able to meet these quotas. This is because over the past few months OPEC+ has been missing its target output by 2.6 million barrels a day. According to Matt Smith, lead oil analyst at Kpler, "OPEC+ may be talking about higher production, but the likelihood of those barrels hitting the market via exports is pretty unlikely."

Naturally this adds further pressure on a market that is already expecting to be 3 million barrels short per day, because of Europe’s ban on Russian oil. In retaliation for the invasion of Ukraine, Europe is looking at banning all Russian seaborne petroleum imports, amongst others. The total revenue from oil exports sank by $9 million between April and May.

Another factor that could be influencing the economy is that China is slowly coming out of a harsh lockdown, creating an increase in demand for oil. As the world’s biggest oil importer, Chinese consumption comes out to a whopping 16 million barrels per day.

In short, the markets are dealing with Russia’s oil being taken off the market while OPEC+ fails to increase production, and China’s exit out of lockdown triggers demand. This is putting a strain on supply on a global scale and propelling the prices upward.

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