Oil prices rose on Thursday, building on a strong rebound from the previous session, amid a potential escalation in tensions in the Middle East. The escalation has raised concerns that a wider conflict in the region could impact oil supplies, which could tighten global markets significantly.
OPEC+ Meeting Awaited
Attention is now focused on the upcoming meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+). Investors are looking for any signs on future oil production plans announced by the cartel.
The OPEC+ Joint Ministerial Monitoring Committee is scheduled to meet online later today. Media reports suggest the cartel may not make any changes to its production levels, despite the recent slide in oil prices that has pushed them to their lowest levels in nearly two months. However, major producers such as Saudi Arabia and Russia are expected to adjust their plans to ease production cuts.
US crude inventories data helped support oil prices, showing a larger-than-expected draw in inventories for a fifth straight week. Fuel demand remains strong during the peak summer travel season. Brent crude futures for October delivery rose 0.5% to $81.24 a barrel, while West Texas Intermediate crude futures rose 0.6% to $78.56 a barrel.
China economic concerns cap gains
The sharp rise in oil prices has been capped by ongoing concerns about the economic recovery in China, the world’s largest oil importer. Those concerns were reinforced by a series of weak purchasing managers’ index (PMI) reports this week. Caixin PMI data showed an unexpected contraction in China’s manufacturing sector, in line with the government’s previous PMI reading. The weak data is fueling calls for more stimulus measures from Beijing, which has yet to provide concrete details on plans to support the economy.
Weak dollar boosts oil prices as concerns over Chinese demand persist
The weakness of the US dollar, triggered by the Federal Reserve’s decision to keep interest rates steady, has helped support oil prices. A weaker dollar typically makes oil more attractive to investors trading in other currencies.
Despite the short-term rally in oil prices, concerns over Chinese oil demand remain a major concern. Recent data showed manufacturing activity in China, the world’s largest oil importer, contracted in July. Crude oil imports to Asia also hit a two-year low, with China’s imports down 2.1% year-to-date compared to last year.
Market Outlook
The short-term outlook for oil prices continues to trend upward, thanks to geopolitical tensions and tighter US supply. However, the longer-term outlook remains uncertain, as concerns over Chinese and broader Asian demand growth continue to weigh on the market. Traders will need to keep an eye on developments in the Middle East and economic data from major oil consumers for clear trends.
On Wednesday, July 31, data from the US Energy Information Administration showed that strong export demand pushed US crude oil inventories down by 3.4 million barrels in the week to July 26, bringing total inventories to 433 million barrels. On the other hand, the US dollar index continued to decline on Thursday from the previous session, after the Federal Reserve decided to keep interest rates on hold while opening the door to a possible cut in September. A weaker dollar could boost demand for oil from investors dealing in other currencies. However, investors remain skeptical about the strength of Chinese demand for oil. Priyanka Sachdeva, an analyst at Philip Nova, says that ongoing concerns about Chinese demand will remain a determining factor for higher oil prices.
Global Oil Stocks Hit Record Deficit: What Are the Impacts?
Oil prices continue to rise significantly, driven by a number of fundamental factors. Most notably, global oil stocks have hit a record deficit compared to historical levels. According to reports, inventories have witnessed a significant decline, which reinforces the upward trend in oil prices. Part of this increase is attributed to improved compliance by OPEC+ with production cuts, which in turn contributes to supporting oil prices.
Analysts expect oil prices to continue their upward trajectory unless diplomatic efforts succeed in calming tensions in the Middle East. This forecast is based on a set of strong fundamentals, such as high demand and low inventories, in addition to increased geopolitical risks. In these volatile conditions, market participants will closely monitor developments in the Middle East and their potential impact on global oil supplies and prices.
In a related context, Saudi Aramco, the world’s largest crude oil exporter, is expected to raise the selling price of its crudes to Asia next September. Aramco is likely to raise the price of its Arab Light crude by $0.50 to $0.80 a barrel, to a premium of $2.30 to $2.60 a barrel over the Oman/Dubai average. The increase comes on the back of record Middle East oil prices, although weak refining margins could limit potential price increases.
The Dubai benchmark has strengthened recently as the spread between the front and third month contracts widened, which typically reflects a bearish market. However, weak refining margins in Asia remain a key factor that could weigh on the prospects for higher Saudi oil prices in September.
Official data from China on Wednesday, July 31, also showed manufacturing activity fell to a five-month low in July as factories faced a drop in new orders and lower prices.
