On Monday, oil prices surged by approximately 3% to reach a one-week high. This increase was driven by optimism regarding rising fuel demand during the summer months, despite the presence of a stronger U.S. dollar and the expectation that the U.S. Federal Reserve will maintain higher interest rates for an extended period. The strengthening of the U.S. dollar can often dampen oil demand since it makes dollar-denominated commodities like oil more costly for holders of other currencies.
Brent futures experienced an increase of $2.01, or 2.5%, settling at $81.63 per barrel. Concurrently, U.S. West Texas Intermediate (WTI) crude saw a rise of $2.21, or 2.9%, closing at $77.74 per barrel. This marked the highest closing price for both crude benchmarks since May 30.
Analysts at the energy consulting firm Gelber and Associates noted that futures are rising due to expectations of robust summer demand supporting prices, even though the broader macroeconomic landscape appears less optimistic than in previous weeks. The Fed’s aggressive interest rate hikes in 2022 and 2023 aimed to curb soaring inflation. These higher rates have increased borrowing costs for consumers and businesses, potentially slowing economic growth and reducing oil demand.
Goldman Sachs analysts predict that Brent crude will rise to $86 per barrel in the third quarter. Their report highlights that strong summer transport demand will likely lead to a third-quarter oil market deficit of 1.3 million barrels per day (bpd). Meanwhile, the U.S. dollar reached a four-week high against a basket of other currencies, driven by the euro’s sharp decline. This decline was attributed to political uncertainty in Europe following the success of far-right parties in the European Parliament elections, which prompted French President Emmanuel Macron to call for a snap national election.
Despite a third consecutive weekly loss for oil last week, concerns linger regarding a plan to unwind some production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, starting in October. This move is expected to contribute to rising supply. Despite the OPEC+ production cuts, oil inventories have increased, with U.S. crude and gasoline stocks rising in the latest week.
Energy consultancy FGE also anticipates a rally in oil prices, projecting that they will reach the mid-$80s by the third quarter. FGE commented that they continue to expect the market to firm up, but a convincing signal of tightening from preliminary inventory data will likely be necessary.
Looking ahead, investor attention is focused on the upcoming release of U.S. consumer price index data for May, scheduled for Wednesday. This data may provide clues about when the Fed might begin lowering interest rates. Additionally, the market is keenly awaiting the conclusion of the Fed’s two-day policy meeting on Wednesday, where the central bank is widely expected to keep interest rates steady.
Market expectations for rate cuts by the Fed in September were tempered following stronger-than-expected jobs data released on Friday. Current pricing reflects less than a 50% chance of a rate reduction, down from a high of 69% last week. Traders have also scaled back their expectations for the amount of Fed easing this year, now anticipating just one rate cut compared to two prior to the payroll data, according to financial firm LSEG.
The market is also anticipating monthly oil supply and demand data from the U.S. Energy Information Administration (EIA) and OPEC on Tuesday, followed by the International Energy Agency (IEA) on Wednesday.
Challenger Energy Group plc (LON:CEG) is a Caribbean and Atlantic margin focused oil and gas company, with a range of petroleum assets located onshore in Trinidad and Tobago, and Suriname, and offshore in the waters of The Bahamas and Uruguay.
