Crude Oil Prices Are Increasing While Supply Remains Tight

crude oil

This week’s crude oil prices are looking good, even as the market anticipates a rate rise after the Federal Reserve meeting on Wednesday.

The efforts of the Fed to suppress damaging inflationary outcomes appear certain to lead to an economic slowdown. The debate is centered around the potential recession.

A slowdown in the world’s largest economy usually sees crude fall under selling pressure with low demand. However, due to supply constraints, WTI has remained relatively buoyant, which is a problem for oil traders.

A hint of underlying supply and demand dynamics within the oil market is backwardation.  This occurs when the contract closest to settlement is more expensive than the contract settling after the first. It shows the market’s willingness to pay more to have immediate market delivery. Backwardation has been on the rise before the invasion of Ukraine by Russia. The recent backwardation is fostered more by supply frailties rather than recession.

Political unrest caused OPEC members’ oil production falls under 600,000 barrels per day since April. Mohamed Oun, the Libyan oil minister, announced that production is back to over 1 million barrels per day after coming to terms with opponents. This development is good news for oil consumers during a period when OPEC experienced difficulties meeting its production targets.

The USD (DXY) index has been sliding in the past weeks, which might have encouraged crude oil to rise at the beginning of the week.

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