On Monday, oil prices nudged higher, buoyed by optimism around increased demand with the summer driving season in full swing, particularly in the critical U.S. market.
By 08:25 ET (12:25 GMT), Brent oil futures had climbed 0.5% to trade at $84.78 per barrel, and West Texas Intermediate (WTI) crude futures saw a similar rise of 0.5%, reaching $81.12 per barrel. This upward trend signifies a continuation of the two-week streak of gains for oil prices. Both benchmarks had surged roughly 3% in the prior week, fueled by a combination of promising demand signals and rising geopolitical tensions.
The U.S. data indicated unanticipated reductions in oil inventories along with enhanced gasoline demand, contributing to a more favorable outlook for crude. The escalating risk of a broader conflict between Israel and Hezbollah, linked to ongoing strife with Hamas, has triggered supply disruption concerns in the Middle East, leading traders to factor in a risk premium. Furthermore, the persistent clashes between Russia and Ukraine, including Ukraine's targeted assaults on key Russian refineries, have amplified worries over potential supply interruptions.
Analysts at ING observed, "We remain supportive towards the oil market with a deficit over the third quarter set to tighten the oil balance." They highlighted that speculators are also becoming more optimistic about oil prospects as we progress into the summer. Speculators increased their net long positions in ICE Brent by 68,535 lots, bringing the total to 140,221 lots as of last Tuesday. ING noted, "Fresh longs entering the market and short covering drove the move fairly evenly."
Additionally, the latest report from Baker Hughes indicated a reduction in the number of operational oil rigs in the U.S., falling by three to 485 last week – the lowest count since January 2022. This trend suggests a potential tightening of supply.
Despite these positive signals, crude oil gains have been somewhat restrained by the robust performance of the U.S. dollar. Traders have adjusted their bets, factoring out the possibility of early interest rate cuts by the Federal Reserve. The dollar remains near a two-month peak against a basket of currencies. A stronger dollar typically weighs down commodity prices, particularly those priced in the greenback like oil, as it makes them more expensive for international buyers.
The dollar's strength has been bolstered by unexpectedly robust purchasing managers index data released last Friday. This week's focus will be on the key PCE Price Index data, the Fed’s favored inflation indicator, with the upcoming reading anticipated to show inflation still well above the central bank's 2% annual target. This would provide the Fed more flexibility to maintain higher rates.
