- Oil rallied to around $100 a barrel on Thursday after the IEA warned of supply risks due to a drop in Russian output from April.
- While demand could shrink by 1.1 million bpd, 3 million bpd will be shut in due to the Russia-Ukraine crisis, it said.
- Crude was also getting a boost from a fall in the dollar, after the Federal Reserve began hiking interest rates.
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Oil prices rose to top $100 a barrel on Thursday, coming back from a slide the previous session, after the IEA warned a coming fall in Russian supply won't make up for an expected drop in demand.
Brent crude gained 5.2% to trade at $103.15 a barrel, but was still heading for a 5% loss this week. West Texas Intermediate crude was up 4.8% at $99.67 a barrel, on track for a similar weekly decline.
The threat of disruption to Russian oil supply has driven the price of crude oil higher in volatile trade since President Vladimir Putin's forces invaded Ukraine in late February.
The market is concerned about a potential supply shock from bans by the US and its allies on Russian oil imports, and the risk that Putin might decide to divert supply in retaliation for Western sanctions.
About three million barrels a day of Russian oil output could be shut in from April, the IEA estimated in its monthly oil market report published on Wednesday. The drop will come as Western embargoes set in and buyers stay away from the country's exports.
The IEA expects global demand to shrink as a result of the surge in oil prices — but by just 1.1 million barrels a day, far below the Russian loss of supply.
"This discrepancy is likely to become even bigger in the coming months given the anticipated decline in Russian oil production. The IEA therefore predicts a significantly undersupplied oil market in the second quarter," Commerzbank strategists said.
Earlier in March, OPEC's secretary general, Mohammed Barkindo, said there is no capacity in the world that could replace Russia's 7 million of barrels per day.
If OPEC raises its oil production as planned in the second half of 2022, the market will be virtually balanced, the Commerzbank strategists said — a "marked change" from their previous forecast for an oversupplied market.
"Over the past week a lot of financial positions have been flushed out, but a tight, physical market remains with widespread voluntary sanctions towards Russian oil and product exports still at work," Bjarne Schieldrop, chief commodities analyst at SEB Research, said.
"The Brent crude oil price is thus likely to be driven back up again in the coming weeks as the war in Ukraine continues. Both supply and demand are hurting, but supply is currently hurting more and a tight oil market for the coming two quarters is to be expected," he added.
Crude oil was also getting a boost on Thursday from a fall in the dollar, which makes it cheaper for holders of other currencies to buy. The US dollar index was down 0.3% at 98.29 at last check.
On the demand side, analysts pointed to the surge in cases of Covid-19 in China as a concern. The speed at which the Omicron variant is spreading means the outbreak could be very bad, with millions of infections, according to SEB's Schieldrop.
"Not only would this hurt oil demand directly due to Chinese lock-downs and reduced mobility. It would also hurt the global economy with reduced supply of products and spare parts flowing out of China," he said.