Brent Crude Hits Two-Month High as China Lifts COVID Restrictions Analyst Predicts $124/Barrel

Brent prices rose on Sunday as Beijing eased pandemic restrictions, declaring a recent epidemic under control. Officials have also been progressively loosening restrictions on Shanghai, which has been under siege for the last two months. China is the world's largest oil importer, and the market has been worried about a drop in demand.

"At a time when global supply and supply chains have been badly affected by sanctions against Russia, demand for crude oil from refineries, the ultimate customers of crude, is expected to surge," Ole Hansen, head of commodities strategy at Saxo Bank, wrote investors in a note.

"Brent may now aim for $124 after breaking over resistance-turned-support at $115," he added.

Not everyone is that upbeat. Brent oil prices have lately risen to between $100 and $115 per barrel, according to Commerzbank, although the bank expects a decline in the second half of the year. They believe that the release of western oil reserves, as well as increasing purchases of Russian oil by India and China, would impact on prices as a result of the loss of Russian oil supplies to Europe.

In a note to clients on Monday, Commerzbank analyst Carsten Fritsch highlighted that the already more liquid August Brent contract was trading about $116 a barrel, also at a two-month high.

While optimism around China's COVID outbreak has drove Brent up nearly 6% since mid-last week, the potential of repeated lockdowns, he added, remains a worry for oil. With China "ready to shut down whole megacities in reaction to even minor outbreaks...it is too early to declare full victory."

This week, members of the Organization of Petroleum Exporting Countries and non-members, including Russia, will convene a virtual conference to discuss output plans, which might provide a new stimulus for energy markets.

Meanwhile, EU ministers will meet again in Brussels on Monday to consider a potential embargo on Russian oil as retaliation for Russia's almost four-month-long invasion of Ukraine. Ministers failed to reach an agreement the day before. Hungary has resisted a solution that affects just seaborne cargo and not pipeline supplies, according to Fritsch.

"If a watered-down oil embargo is imposed, Russia is unlikely to find it difficult to sell its oil to other users, particularly in Asia, implying that the impact on the oil market would be minimal." Overall, we believe the recent price increase is excessive," Fritsch remarked.

On Friday, the U.S. benchmark reached its highest level in more than 11 weeks, as the summer driving season began over Memorial Day weekend, and inventories remained low. According to the US Energy Information Administration, the average retail price of normal gasoline in the United States was $4.59 per gallon heading into the Christmas season, the highest inflation-adjusted (real) price since 2012.