Oil markets are heating up. 

Crude prices rallied around 1% on Monday, with U.S. WTI futures closing at a five-month high of $83.71 per barrel. 

The rally was fueled by mounting expectations that economic growth in the U.S. and China will drive demand higher, coupled with tightening global supplies due to OPEC+ production cuts and disruptions to Russian refineries.

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• Oil prices surge to 5-month highs, with U.S. WTI crude closing at $83.71/barrel.

• Rally fueled by optimism over economic growth boosting demand in the U.S. and China.

• Supply tightness from OPEC+ cuts and disruptions to Russian refineries providing support.

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Oil Prices Surge to 5-Month Highs on Demand Optimism and Supply Tightness.

Bullish Demand Outlook Propels Oil Higher

The primary catalyst behind oil’s upswing is an increasingly optimistic demand outlook, particularly in the world’s two largest economies and oil consumers. 

In the U.S., data showed the manufacturing sector grew for the first time in 1.5 years during March, signaling a potential economic rebound. 

Analysts suggest moderating inflation could prevent the Federal Reserve from cutting its June interest rate, providing an additional tailwind for growth and oil demand.

Meanwhile, according to official data, China’s manufacturing activity expanded in March for the first time in six months. 

As the world’s largest crude importer, rebounding economic activity in China could significantly bolster global oil consumption.

According to Bob Yawger, director of energy futures at Mizuho, “Chinese oil demand is arguably the one missing factor outside of geopolitical headlines capable of taking oil prices to the next level.”

Supply Disruptions Add to Oil’s Rally

Compounding oil’s rally are mounting supply constraints resulting from OPEC+ production cuts and attacks on Russian refineries. 

OPEC’s largest producer, Saudi Arabia, is expected to raise official selling prices for its flagship Arab Light crude in May, reflecting the recent strength in Middle East benchmarks.

Russian Deputy Prime Minister Alexander Novak stated that Russian oil companies will prioritize reducing output rather than exports in Q2 to comply with OPEC+ quotas. 

Moreover, drone attacks from Ukraine have knocked out nearly 1 million barrels per day of Russian refining capacity, likely curbing the country’s fuel exports.

While demand prospects look increasingly promising, Goldman Sachs analysts noted European oil demand was firmer than expected in February, rising by 100,000 barrels per day versus forecasts for a 200,000 bpd contraction in 2024.

The combination of rebounding demand and constrained supplies has analysts like Yawger proclaiming, “Strong summer gasoline demand and a rebound in China oil demand could be the one-two punch that supports $100 a barrel.”

As economic growth regains momentum and supply remains tight, oil markets appear poised for further gains, with bulls firmly in control. 

Traders will closely monitor incoming data on U.S. jobs, inflation, and Chinese economic activity for clues on the sustainability of this nascent oil rally.