Questions arise over demand destruction as oil hits $100 per barrel.

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The surge in oil prices, driven by supply cuts from heavyweight crude producers, has led some analysts to question the sustainability of the price rally. While Brent crude futures rose to $96.01 per barrel, close to the $100 mark, concerns about potential future demand destruction and global economic fragility remain. Some European market participants doubt that triple-digit oil prices can be sustained in the long term, citing factors such as high refinery margins, potential inventory drops, and the possibility of buyers reducing their output runs. Additionally, uncertainties over China fuel export quotas and Russia’s indefinite ban on fuel exports have tightened availabilities of refined products, exacerbating global diesel shortages.
 
The rise in oil prices has been supported by voluntary cuts in production from key oil-producing nations, which fall outside of the official policy of the Organization of the Petroleum Exporting Countries (OPEC+) and its allies. Saudi Arabia and Russia have pledged to cut production, further contributing to the tightening market. While some refiners have taken advantage of attractive refining margins by lightening their seasonal maintenance, uncertainties still remain, including the potential impact of high-impact hurricanes on offshore crude oil production and refining capacity. Despite these factors, some European market participants remain skeptical about the long-term sustainability of triple-digit oil prices due to concerns over demand destruction and steep backwardation in the market.
 
The White House has been silent in response to the production declines and has refrained from publicly pressuring OPEC+ producers to increase output. However, the White House faces a difficult balancing act as it seeks to normalize ties between Israel and Saudi Arabia, both key allies in the Middle East. At the upcoming meeting of the OPEC+ technical committee, no policy tweaks are expected to be made. The limited options available to the US government to bring prices down have led analysts to speculate on the possibility of an energy component in a potential US-Saudi deal. However, uncertainties remain regarding the US administration’s next steps to secure additional barrels of oil and potentially bring down prices.
 
In summary, while supply cuts from heavyweight crude producers have driven oil prices close to $100 per barrel, concerns about potential demand destruction and global economic fragility cast doubt on the sustainability of this price rally. Some European market participants believe that triple-digit oil prices cannot be sustained in the long term, considering factors such as high refinery margins and potential inventory drops. Uncertainties over China fuel export quotas, Russia’s fuel export ban, and steep backwardation in the market also contribute to concerns about the sustainability of high oil prices. The White House faces challenges in managing its relationships with key allies in the Middle East and finding options to bring down oil prices.

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