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Oil prices continued their upward trajectory on Wednesday, approaching a two-month high, driven by expectations of dwindling inventories during the peak summer demand season and heightened geopolitical tensions in the Middle East.
Market Dynamics
Brent crude oil futures rose 0.7% to $85.64 a barrel, while U.S. West Texas Intermediate crude futures gained 0.9% to $81.57. This positive momentum builds upon last week’s gains, where both benchmarks surged by approximately 3%.
Despite a slight increase in U.S. crude oil stocks reported by the American Petroleum Institute, analysts anticipate a significant decline of nearly 3 million barrels in the official inventory data due to be released later on Wednesday. The expectation of dwindling inventories, coupled with robust summer demand, particularly in the U.S., is bolstering oil prices.
Dollar Strength and Interest Rate Expectations
However, the strengthening dollar acted as a counterweight, limiting the extent of oil price gains. Market participants remain optimistic about a potential interest rate cut before the end of the year, which has supported the dollar’s value. A stronger dollar makes oil more expensive for buyers using other currencies, potentially dampening demand.
Geopolitical Tensions
Adding to the bullish sentiment are escalating geopolitical tensions in the Middle East. Houthi attacks on shipping in the Red Sea and mounting hostilities between Israel and Hezbollah in Lebanon have raised concerns about potential disruptions to oil supply, further driving up prices.
Strong Physical Demand
The market is also witnessing strong physical demand for oil, reflected in the higher prices for front-month Brent and WTI contracts compared to September prices. This indicates a healthy appetite for immediate oil deliveries, further supporting near-term price increases.
Outlook
The oil market remains sensitive to a confluence of factors, including supply and demand dynamics, geopolitical risks, and macroeconomic trends. While the upcoming U.S. inventory data and the trajectory of the dollar will be closely monitored, the overall outlook for oil prices appears to be positive in the near term, driven by robust summer demand and ongoing geopolitical uncertainties.
