Oil prices rose sharply this week, aided by optimism that Greece will get more financial aid from the EU and speculation that Saudi Arabia could take action to prop up the prices.
It is now unlikely that Greece will default on its debts anytime soon after the Greek parliament passed a new round of austerity measures on Wednesday and Thursday.
The austerity package was designed to save the debt-laden country €28 billion in budget expenses over the next five years. The successful passage of the bill means that Greece will almost certainly secure the next €12 billion payout from the EU, the last instalment of last year’s €110 billion bailout deal.
Traders feared that a debt default by Greece would cause considerable collateral damage to other euro zone states and trigger another financial meltdown, which would reduce energy demand. With that prospect now unlikely, the outlook for oil prices looks brighter.
Futures for crude oil received more support from expectations that OPEC’s most influential member Saudi Arabia will cancel plans to boost production by 1 million barrels.
Saudi Arabia was preparing to raise production to avoid supply shortages in the market after OPEC decided not to raise current production quotas at a meeting in Vienna three weeks ago.
However, it is now likely that the kingdom will change its plans after last week’s announcement from the International Energy Agency (IEA).
The agency, whose main mission is to ensure that the oil market is well supplied, said last Thursday it would tap into its strategic reserves to release 60 million barrels in the market to make up for the supply shortage resulting from the ongoing civil war in Libya.
Oil prices fell sharply on the announcement with US benchmark crude contracts for August and September delivery shedding more than US$8 per barrel on the New York Mercantile Exchange (NYMEX) at the end of last week.
This week, a survey of Bloomberg analysts showed that most of them expect Saudi Arabia to increase production by 500,000 barrels to 9.5 million barrels per day in response to the sharp fall in oil prices resulting from IEA's decision. The kingdom initially planned to up production to 10 million barrels per day.
Gains in oil prices were trimmed by mixed manufacturing data, which came out at the end of the week.
US data was positive, with Thursday’s update on the Chicago purchasing managers (PMI) index showing an increase from 56.6 in May to 61.1 in June, a sign that business activity is picking up in one of the country’s key industrial regions.
On Friday, the Institute for Supply Management (ISM) said that its US manufacturing gauge climbed from 53.5 in May to 55.3 in June, while analysts expected to see a decline.
The upbeat reports were offset by weak Chinese industrial data. On Friday, the Chinese government said that the country’s official PMI slipped from 52 in May to 50.9 in June.
The government figures were in line with last week’s HSBC’s PMI survey. HSBC and Markit said that their Chinese industry gauge hit the lowest level in 11 months, sliding to 50.1 in June from 51.6 in May.
The slowdown in industrial activity in China is seen as a direct result of a series of policy tightening measures imposed by the Chinese government this year in an attempt to curb inflation.
Lower levels of growth in the world’s second biggest economy are likely to reduce demand for commodities including oil and metals, so any bearish news from China negatively affects commodity prices and resource stocks.
US light, sweet crude for August delivery ended the week at US$94.86/barrel, up from US$91.10/barrel a week ago. August Brent crude closed at US$111.24/barrel on Friday after ending the previous week at US$105.63/barrel.
Oil and gas stocks were in demand this week. BP (LON:BP) rallied from 437 pence a week ago to 459 pence. Fellow supermajor Royal Dutch Shell (LON:RDSB) surged from 2,116 pence to 2,238 pence.
Tullow Oil (LON:TLW) advanced from 1,216 pence to 1,252 pence over the past five days of trading, Cairn Energy (LON:CNE) climbed from 379 pence to 418 pence and BG Group (LON:BG) rose from 1,275 pence to 1,427 pence.