Oil prices climbed about two per cent to a one-week high on Monday, a positive sign for the market buoyed by hopes of rising fuel demand this summer. Despite a stronger US dollar and expectations that the US Federal Reserve will leave interest rates higher for longer, Brent futures rose $1.36 to $80.98 a barrel, while US West Texas Intermediate (WTI) crude rose $1.46 to $76.99. This puts both crude benchmarks on track for their highest closes since May 31. Goldman Sachs analysts expect Brent to rise to $86 a barrel in the third quarter, citing solid summer transport demand that will push the oil market into a third-quarter deficit of 1.3 million barrels per day (bpd).
The Fed uses higher interest rates to reduce inflation, which can slow down economic growth and reduce demand for oil. Similarly, a stronger US dollar can reduce demand for oil as it makes dollar-denominated commodities like oil more expensive for holders of other currencies. The US dollar recently rose to a one-month high against a basket of other currencies as the euro fell sharply due to political uncertainty in Europe. Despite these challenges, there is a growing conviction that demand will be strong as the summer driving season approaches, leading to considerable stock draws.
Oil prices faced concerns last week, posting a third straight weekly loss due to worries about a plan to unwind some production cuts by the Organisation of the Petroleum Exporting Countries (Opec) and its allies from October. Despite the Opec+ cuts, oil inventories have increased, with rising US crude stocks and gasoline stocks posing a challenge. Energy consultancy FGE predicts oil prices will rally, reaching the mid-$80s in the third quarter. They believe the market will firm up but may need convincing signals of tightening based on preliminary inventory data.
Investor attention is now focused on the key US Consumer Price Index inflation data for May, set to be released on Wednesday, providing hints on when the Fed may start reducing interest rates. The conclusion of the Fed’s two-day policy meeting on Wednesday will also be closely watched, with expectations that the central bank will hold interest rates steady. Market expectations for rate cuts by the Fed in September have been dialed back after recent data, with pricing now reflecting a less-than-50 per cent chance of a reduction. Traders have also reduced their expectations for the amount of easing this year, implying just one cut versus two prior to the payrolls data.
Overall, the oil market is seeing positive momentum with prices climbing to one-week highs despite the challenges posed by a stronger US dollar and expectations of higher interest rates. The summer driving season is expected to boost demand, pushing the oil market into a deficit in the third quarter. While concerns about increased production and rising inventory levels persist, there is optimism that the market will firm up and prices will continue to rise. Investor focus is now on key economic data releases and the outcome of the Fed’s policy meeting for further insights on the future direction of oil prices.
