Oil Prices Edge Higher Amidst Summer Driving Optimism, Geopolitical Concerns

Oil Prices Edge Higher Amidst Summer Driving Optimism, Geopolitical Concerns

Oil prices continued their upward trend on Monday, buoyed by expectations of increased demand during the summer driving season, particularly in the crucial U.S. market.

As of 08:25 ET, Brent oil futures rose 0.5% to $84.78 a barrel, while West Texas Intermediate crude futures climbed 0.5% to $81.12 a barrel. This marks the second consecutive week of gains for both benchmarks, which rose around 3% last week.

The recent price surge is attributed to a combination of factors, including positive demand signals from the U.S. and escalating geopolitical tensions in the Middle East and Ukraine. Unexpected draws in U.S. oil inventories and improved gasoline demand have painted a brighter picture for crude, while the growing risk of an all-out war between Israel and Hezbollah and continued clashes between Russia and Ukraine have raised concerns about supply disruptions.

Analysts at ING expressed their support for the oil market, predicting a deficit over the third quarter that will tighten the oil balance. They also noted a growing bullish sentiment among speculators as the summer season approaches.

Further supporting the price increase is a decline in the number of operating oil rigs in the U.S., which fell to its lowest level since January 2022. This reduction in drilling activity could potentially limit future supply.

However, the gains have been somewhat tempered by the strength of the U.S. dollar, which is near a two-month high against a basket of currencies. A strong dollar makes crude more expensive for foreign buyers, potentially dampening international demand. The dollar’s strength is also attributed to stronger-than-expected purchasing managers index data, which suggests a robust U.S. economy.

The focus this week will be on the PCE price index, the Federal Reserve’s preferred inflation gauge. The reading, expected on Friday, is anticipated to show inflation remaining well above the Fed’s 2% annual target, potentially giving the central bank more leeway to maintain high interest rates.

Overall, the oil market remains dynamic, influenced by a complex interplay of demand expectations, geopolitical events, and macroeconomic factors. As the summer driving season progresses and global events unfold, oil prices are likely to remain volatile, with investors closely monitoring developments for further cues.