Oil prices slip slightly, but set for first positive week in three

Investing.com-- Oil prices fell slightly Friday as traders remained on edge over slowing growth and weakening demand, although were on course for the first weekly gain in three weeks after U.S. President Donald Trump and Chinese leader Xi Jinping resumed trade talks, raising hopes for increased economic activity. 

At 08:00 ET (12:00 GMT), Brent oil futures fell 0.1% to $65.30 a barrel, while West Texas Intermediate crude futures dropped 0.1% to $63.28 a barrel.

Oil heads for weekly gains, but demand fears remain

The Brent contract traded over 2% higher and WTI futures gained over 4% this week, helped by growing bets that global supplies will tighten in the coming months.

Reports that the U.S. was considering more sanctions against Russia drove this notion, as did signs of strain in U.S.-Iran nuclear talks. 

Oil markets were also encouraged by the Organization of Petroleum Exporting Countries and allies (OPEC+) deciding to raise supply in July by the same amount as the previous two meetings, ruling out concerns of a bigger increase.

But oil still faced some headwinds, with a key weight being sustained concerns over slowing demand, especially amid growing signs of softening global economic conditions.

A host of weak economic prints from top oil consumers U.S. and China raised questions over demand, especially as the world’s biggest economies remained engaged in a tariff exchange. Outsized builds in U.S. oil product inventories also added to uncertainty over demand. 

U.S. President Donald Trump and Chinese President Xi Jinping held a call on Thursday that could mark a resurgence in U.S.-China trade talks, although markets were still holding out for a more permanent trade deal.

Fears of Trump imposing more tariffs, however, still remained in play.

Russia-Ukraine escalation supports prices 

Reports early-Friday showed Russia had launched a series of missiles and drone strikes against Ukraine, likely retaliation for several devastating attacks by Kyiv on Russian infrastructure earlier this week.

The attacks further undermined U.S. attempts to broker a ceasefire, with Moscow’s latest offensive reportedly coming just days after Trump and Russian President Vladimir Putin spoke.

But expectations of sustained hostilities between Moscow and Kyiv are likely to draw more U.S. attempts at pressuring Russia into a ceasefire, which could involve stricter sanctions on Russia’s oil industry. 

Reports earlier this week showed a bipartisan push for more sanctions against Russian oil, this time targeting major buyers China and India.

HSBC sees downside potential 

Despite this week’s gains, HSBC flags potential downside to the Brent price outlook.

The OPEC+ producer group is expected to accelerate supply hikes later this year, possibly leading to a surplus in the fourth quarter that could place some downward pressure on oil prices, according to analysts at HSBC.

Since April, the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, has either made or announced output upticks totalling some 1.37 million barrels per day, or 62% of the 2.2 million of the total amount of supply it plans to put back into the market.

Strategists have suggested that these countries, which include producers like Saudi Arabia and Russia, are attempting to recapture some market share during a time of broader economic uncertainty stemming from global trade tensions and an ongoing transition to greener fuel sources.

Traditionally strong demand in the summer travel season is expected to absorb the impact of the OPEC+ output increases, the HSBC analysts said. But they flagged that the hikes "should tip the market into a bigger fourth quarter surplus than previously forecasted".

"Deteriorating fundamentals after summer raise downside risks to oil prices and our $65 per barrel assumption from fourth quarter onwards," the analysts added.

Ambar Warrick contributed to this article