Strong Fundamentals Suggest Oil Prices Will Continue to Climb

• Strong demand from peak driving season and lower OPEC exports are pushing oil prices higher.
• Increased US travel and potential hurricane disruptions could further tighten the oil market.
• Analysts predict oil prices could reach $90 per barrel, with some suggesting OPEC might intervene if prices hit $100.

Crude oil prices look set to climb higher this week and the rise could extend into the coming weeks as well, analysts are predicting. The question on everyone’s minds: how high would OPEC let oil climb before rolling back the output cuts?

“Strong market fundamentals are pushing oil prices higher this week, on track for four consecutive weeks of increases,” Rystad Energy’s global markets analysis director Claudio Galimberti wrote in a note this week.

“Lower crude exports from OPEC and Russia, just as refinery runs ramp up for the summer peak, are helping contribute to a tighter-than-expected market, and prices are reacting accordingly,” Galimberti also wrote, adding that the growing likelihood of interest rate cuts in the United States was also helping, as was continued geopolitical tension in the Middle East.

Oil has been on the rise for three weeks now, and this week prices got a push upwards from the Energy Information Administration, which estimated a substantial draw in inventories for the week to June 28. The draw came in at 12.2 million barrels and was accompanied by draws, albeit smaller, in fuel stocks as well.

The figures confirm expectations that peak driving season in the United States is doing what it always does—pushing oil demand higher—despite the continuing challenging economic environment, especially in interest rates.

The AAA earlier this week predicted that a record 71 million Americans would be traveling for this July 4 weekend—a number higher than pre-pandemic travel numbers. “With summer vacations in full swing and the flexibility of remote work, more Americans are taking extended trips around Independence Day,” AAA’s senior vice president travel, Paula Twidale, said as quoted by NBC.

“We anticipate this July 4th week will be the busiest ever with an additional 5.7 million people traveling compared to 2019,” she also said, noting that most of these people, or over 60 million, were traveling by vehicle. This would have a direct impact on demand for fuels, boosting crude prices.

Meanwhile, as noted by Rystad Energy’s Galimberti, OPEC oil exports declined in June, just ahead of peak driving season in the U.S.—where production growth is beginning to slow down in response to prices.

“Already in June, Opec+ exports are sharply lower, led by the Gulf countries and Iraq, in part due to summer crude burn amid the ongoing heatwave in the Middle East,” Energy Aspects said in a note this week, even as production of crude oil increased, as estimated by a survey that Reuters conducted based on shipping data and industry sources.

The estimated increase was nothing to write home about, at 70,000 barrels daily, of which 50,000 barrels daily came from additional output in Nigeria, even as the state oil company declared a state of emergency on production.

Oil theft and pipeline vandalism have long plagued Nigeria’s upstream oil and gas industry, driving majors out of the country and often resulting in force majeure at the key crude oil export terminals. The combination of pipeline vandalism and oil theft with a lack of investment in capacity has made Nigeria the biggest laggard in crude oil production in the OPEC+ alliance. Due to the underproduction, OPEC last year even reduced the quota for Nigeria’s oil production.

In addition to this slew of bullish factors, U.S. hurricane season is underway and may at some point lead to a disruption in production and refining operations on the Gulf Coast. With the strong fundamentals that we are witnessing right now, crude oil could top $90 per barrel and keep going, analysts at Standard Chartered said earlier this week. In answer to the OPEC question, however, it will be a while before the cartel makes the decision to roll the cuts back. Brent might have to hit $100 for that.

By Irina Slav for Oilprice.com

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