Where will the Western price restrictions go? International oil prices are rising again! Russian Ural oil price breaks $60

Since July, international oil prices have fluctuated upwards, and investors expect global supply to further tighten. On the 27th, WTI crude oil futures in the United States hit a high of over $80 per barrel for the first time in three months, almost regaining ground lost this year. At the same time, the price of Ural crude oil futures in Russia has rebounded to over $60, which is about to trigger the Western Union's price limit order.

Valga, Senior Market Analyst at crude oil brokerage PVM Oil Associates, said in an interview with First Financial reporters that after OPEC+reiterated its determination to reduce production, market attention has shifted to the recovery prospects. The IMF raised its global growth forecast to 3% this week, which means supply and demand will become more tense in the second half of the year. For the United States, the implementation of price limit orders will face a test, and how to avoid impacting market supply and triggering a new round of inflation will become a challenge.

Strong demand and optimistic outlook for oil prices

Since July, international oil prices have accumulated a rise of over 10%. Factors such as tight supply from oil producing countries, optimism about the global economic outlook, and expectations of central bank interest rate hikes coming to an end continue to support prices.

Walga told First Financial that the supply and demand relationship in the second half of the year will tighten, largely determined by the OPEC+production reduction stance. This month's OPEC monthly report shows that global oil demand in the second half of the year is about 102.58 million barrels per day, and the oil supply from non OPEC countries will decrease by 780000 barrels per day during the same period, which will greatly boost OPEC's oil demand. It is expected that the demand for OPEC in the second half of this year will be 30.4 million barrels per day, an increase of nearly 2 million barrels from the first half, which will result in a decrease of 1.95 million barrels per day in global oil inventories.

On the other hand, the recovery of the Chinese economy and the possibility of a soft landing for the US economy are also positive factors. Valga analyzed that China's recovery prospects are worth paying attention to, and with the continued strengthening of positive policy expectations, crude oil demand is expected to continue to grow strongly in the second half of the year. The growth rate of US GDP in the second quarter exceeded market expectations, and the demand in the labor market was strong, reducing the potential risk of recession.

UBS believes that recent unplanned shutdowns have also helped boost oil prices during the summer season of strong demand in the northern hemisphere. The bank predicts that as Saudi Arabia's voluntary plan to reduce production by an additional 1 million barrels in July and August takes effect, the market should further tighten. According to UBS's calculations, the market supply deficit in June was 700000 barrels per day, and the deficit will rise to 2 million barrels per day in July and August. The report states, "Once onshore oil inventories show a significant decline, we expect oil prices to further rise."

Bank of America predicts that global oil prices will rise to $90 in the second half of the year. The head of commodity research at the bank, Blanche, stated that the gap will continue to widen in the next six to nine months. "In addition to rising demand and OPEC+production reduction, the inability to keep up with US shale oil production capacity is also an important factor. In the US, the practice of releasing oil from strategic reserves needs to be reversed. Currently, strategic crude oil inventories are below 350 million barrels and need to be replenished to 500 million or 600 million barrels."

Valga told First Financial that the short-term trend of oil prices has become clear, and the gradually emerging supply-demand tension will keep prices elastic. On the supply side, OPEC+will adhere to a stable market position, and Saudi Arabia may extend its voluntary production reduction until the end of September. At the same time, non OPEC+countries seem unable to quickly increase supply. He believes that under optimistic circumstances, the oil distribution will soon challenge this year's high of $89 per barrel.

The Russian oil price limit order will be triggered

The tight supply and demand have not only driven international oil prices, but also driven the price of Russian Ural crude oil futures. As the premium narrows to below $20, Ural crude oil has already exceeded $60 per barrel, which will trigger relevant restrictive measures.

Since the Russia-Ukraine conflict, EU countries have started to take multiple rounds of sanctions against Russian crude oil imports. Since December last year, the Group of Seven, the European Union, and Australia have implemented a price limit order of $60 per barrel on Russian sea freight oil, pricing premium crude oil products and discounted crude oil products for Russia at $100 per barrel and $45 per barrel, respectively. Western countries want to use their control over world maritime insurance, financing, and shipping services to restrict Russia's oil exports.

It should be noted that due to the US Treasury Department using monthly average prices to calculate the benchmark price of Ural crude oil, it may take some time for Russian oil to be considered above the limit.

The price difference between Ural crude oil and Brent crude oil has returned to below $20

According to the Office of Foreign Assets Control of the US Treasury Department, individuals or companies that evade or violate the cap may face civil or criminal enforcement actions and will cooperate with other countries to share relevant information. According to sources cited by the media, the Biden administration has contacted some relevant parties to remind them to comply with the Western Union's price cap agreement.

However, the US government seems to want to avoid market distortions. Sources say that the Biden administration is expected to adopt a "soft" strategy instead of imposing strict enforcement on potential violators. "The initial stance of the Treasury Department was moderate, not to hammer oil tankers and ship owners like a hammer, but to quietly execute through letters and phone calls.".

According to data from the American Automobile Association, as the summer consumption peak approaches, regular gasoline in the United States reached $3.714 per gallon on Thursday, the highest level since mid November 2022, and energy inflation may make a comeback at any time.

Valga told First Financial that for the Biden administration seeking re-election, the rise in energy prices is undoubtedly a significant risk, as it could reverse the previously falling inflation trend and reignite the pressure for further tightening by the Federal Reserve. In the current environment, it is clearly not easy to ensure market liquidity while limiting oil prices. If we persist in implementing price limits, it may exacerbate the momentum of oil price increases. He believes that there are many uncertainties in increasing production on the supply side, and besides continuing to release strategic reserves, raising price limits is one of the few options.