Oil prices have been on a steady rise, driven by the anticipation of high summer demand and strategic production cuts by OPEC+. This trend is expected to continue throughout the summer months, despite various global economic challenges and geopolitical tensions.
As summer kicks into high gear, the demand for fuel, particularly for transportation and air-conditioning, is expected to peak. This surge in consumption is anticipated to create a supply deficit, further pushing up oil prices. Initial trading on Monday saw a little increase in the price of oil, which was backed by projections of a supply deficit that was caused by peak summer gasoline use and cuts made by OPEC and other countries during the third quarter.
Brent crude futures saw a modest rise of 16 cents, reaching $85.16 a barrel, while U.S. West Texas Intermediate (WTI) crude futures increased by 17 cents to $81.71 a barrel. Both contracts experienced a 6% increase in June, with Brent consistently settling above $85 a barrel following OPEC+'s decision to extend significant oil output cuts until 2025.
Impact of OPEC+ Production Cuts
The Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, have played a crucial role in stabilizing oil prices by extending their deep production cuts. These cuts are expected to continue well into 2025, contributing to the anticipated supply deficits in the third quarter. As noted by Tony Sycamore, an analyst at IG, "Hopes of an interest rate cut by the U.S. Federal Reserve and rising geopolitical concerns in Europe and between Israel and Lebanon's Hezbollah have also kept a floor under prices".
Geopolitical Tensions and Economic Factors
Geopolitical tensions, particularly in the Middle East, have also influenced oil prices. Recent conflicts between Israel and Lebanon's Hezbollah, as well as ongoing issues in Ukraine, have added a risk premium to oil prices. Additionally, the possibility of a U.S. Federal Reserve interest rate cut has provided some support to the market.
In the U.S., oil production and demand reached a four-month high in April, according to the Energy Information Administration's (EIA) Petroleum Supply Monthly report. Market participants are closely monitoring the impact of hurricanes on oil and gas production and consumption in the Americas, with the Atlantic hurricane season already underway.
Challenges in China
Despite the positive outlook in other regions, China's oil demand has shown signs of weakness. Recent manufacturing data indicated a decline for the second consecutive month in June, with services activity also dropping to a five-month low. This has led to calls for additional stimulus measures as China's economy struggles to recover.
Looking ahead, analysts remain cautiously optimistic about oil prices. The market is expected to remain volatile, influenced by a combination of supply constraints, geopolitical tensions, and economic factors. As summer progresses, the anticipated high demand for fuel is likely to keep prices elevated, although any significant changes in global economic conditions or geopolitical events could alter this trajectory.
