Rocky road ahead for oil market as global production increases and economic slowdown loom large

Rashid Husain SyedThe bulls have taken control of the oil markets, edging out the bears. However, the question remains: Will this dominance last? The answer appears to be no.

After a period of aggressive short selling that pushed futures to their lowest levels in months, crude prices have surged. Since early June, both Brent crude and West Texas Intermediate have risen by almost 10 percent. Despite a one percent drop on Friday due to concerns about global oil demand affected by a strong U.S. dollar and negative economic news, both crude benchmarks were up about three percent for the week, following a four percent gain the previous week.

Several factors are driving this change in market sentiment. Reports indicate a surge in global crude demand. The U.S. Energy Information Administration (EIA) reported a significant decline in crude inventories, which fell by 2.5 million barrels to 457.1 million barrels for the week ending June 14.

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Additionally, U.S. gasoline stocks dropped by 2.3 million barrels, surpassing predictions of a 600,000-barrel build. Distillate stockpiles, including diesel and heating oil, also decreased by 1.7 million barrels against an anticipated rise of 300,000 barrels. This comprehensive reduction in inventories has significantly contributed to the bullish sentiment in the oil market.

Gasoline consumption in the U.S. has hit a post-pandemic high, reaching 9.4 million barrels per day last week. This surge aligns with expectations of 71 million Americans travelling during the upcoming July 4th holiday, further boosting demand. James Hyerczyk, the owner of J.A.H. Research and Trading, quoting JPMorgan, reports that global oil demand has also increased by 1.4 million barrels per day this month, driven by robust summer travel across Europe and Asia.

The onset of hurricane season is also contributing to the bullish trend. Tropical Storm Alberto swept across Mexico, prompting U.S. refiners to stock up on crude, especially barrels produced in the Gulf of Mexico.

Several countries are moving to cut interest rates, and signs of a cooling U.S. job market have sparked speculation about potential Federal Reserve rate cuts. Lower interest rates typically boost economic growth and, in turn, increase oil demand.

Geopolitical tensions are also impacting oil market dynamics. Attacks by the Houthis on commercial vessels in the Red Sea and escalating conflict between Israel and Hezbollah have heightened the vulnerability of crucial shipping channels, affecting global crude supplies. The ongoing Israeli war on Gaza and potential broader regional conflicts further contribute to market uncertainty.

Despite these bullish factors, the long-term outlook for the oil market remains uncertain. In the eurozone, business growth slowed sharply this month as demand fell. Meanwhile, global production increases continue to cloud market sentiment. Brazil, an OPEC member without any commitment to reduce output, has rebounded from a significant collapse, complicating OPEC+ efforts to control global supplies and support prices.

Daily crude output in Brazil began the year at 3.73 million barrels but plummeted nearly 25 percent due to offshore platform repairs. Now, more than one-third of the deficit has been restored. These additional barrels will hinder the efforts of the Organization of Petroleum Exporting Countries to boost prices by cutting production.

Although crude prices have recovered recently, the long-term supply outlook remains bearish due to OPEC+’s spare capacity and rising production from the U.S., Guyana, and Brazil. The future remains gloomy.

Toronto-based Rashid Husain Syed is a highly regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. In addition to his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.

For interview requests, click here.

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