Oil extends gains as supply fears outweigh China lockdowns

On the supply side, OPEC+ is likely to stick to its existing deal and agree another small output increase for June when it meets on May 5, six sources from the producer group told Reuters on Thursday.

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LONDON: Oil prices rose for a fourth day on Friday as fears over Russian supply disruption outweighed the impact of COVID-19 lockdowns in China, the world’s biggest crude importer, Reuters is reporting.

Brent crude futures rose by $2.21, or 2.1 percent, to $109.80 a barrel by 1358 GMT after gaining 2.1 percent in the previous session. The front-month June contract expires later on Friday. The more active July contract rose by $1.95 to $109.21.

US West Texas Intermediate crude gained $1.44, or 1.4 percent, to $106.80 after advancing by 3.3 percent on Thursday.

Both contracts are set to finish up on the week and post their fifth straight month of gains, buoyed by the increased likelihood that Germany will join other European Union member states in an embargo on Russian oil.

“Despite the impact that Chinese lockdowns are having, the risks remain tilted to the upside, especially if the EU manages to deliver on an immediate embargo,” said Craig Erlam, senior market analyst at OANDA.

Oil prices have remained volatile with China showing no signs of easing lockdown measures despite the impact on its economy and global supply chains.

“With both full and partial lockdowns ramping up since March, China’s economic indicators have plunged further into the red. We now expect China’s GDP to slow further in Q2,” Wood Mackenzie’s head of APAC economics, Yanting Zhou, said in a note.

On the supply side, OPEC+ is likely to stick to its existing deal and agree another small output increase for June when it meets on May 5, six sources from the producer group told Reuters on Thursday.

However, Russian oil production could fall by as much as 17 percent this year, an economy ministry document seen by Reuters showed on Wednesday, as Western sanctions over Russia’s invasion of Ukraine hurt investments and exports.

Sanctions have also made it increasingly difficult for Russian ships to send oil to customers, prompting Exxon Mobil Corp. to declare force majeure for its Sakhalin-1 operations and curtail output.

But the rally could stall and prices average at just below $100 a barrel this year, a Reuters poll found on Friday, as economic risks and China’s COVID lockdowns counter supply shortfalls due to the Ukraine war.

U.S. gold futures gained 1.1% to $1,911.20 per ounce.

Gold is considered a hedge against soaring inflation and uncertainties, but rising interest rates dampen its appeal by increasing the opportunity cost of holding the non-interest bearing asset.

Gold prices rallied 1% on Friday on the back of a retreat in the dollar, but the metal was set to end the month lower on bets of aggressive policy tightening by the U.S. Federal Reserve.

Spot gold was up 0.7% at $1,908.20 per ounce by 1607 GMT. However, it was on course its first monthly drop since January with a decline of 1.5% so far in April.

“Gold market has seen consistent sell-off in the past weeks as the dollar rallied. Currently, the dollar index has declined, which is lifting gold prices,” said Edward Meir, an analyst with ED&F Man Capital Markets.

The dollar index fell 0.4% after touching a 20-year high on Thursday, making gold less expensive for those holding other currencies.

Further lifting bullion’s appeal, data showed the U.S. economy unexpectedly contracted in the first quarter amid a resurgence in COVID-19 cases and drop in pandemic relief money from the government.

U.S. labour costs surged by the most in 21 years in the first quarter, pointing to rising wage inflation and supporting the Federal Reserve’s aggressive monetary policy stance.

“The GDP data and the cost index for employment data showed that inflation still running fairly hot, this is generally supportive for gold,” Meir said.

Gold is considered a hedge against soaring inflation and uncertainties, but rising interest rates dampen its appeal by increasing the opportunity cost of holding the non-interest-bearing asset.

The markets focus now shifts to the U.S. central bank’s two-day policy meeting starting on May 3, with officials expected to increase the target policy rate by half a percentage point.

Spot silver fell 0.5% to $23.03 per ounce, while platinum advanced 1.7% to $935.65. Both metals were set to post a monthly fall.

Palladium rose 2.4% to $2,286.08 per ounce.

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