Oil Prices Surge Amid Inventory Drop and Middle East Tension

A tighter inventory draw in the US and rising geopolitical tensions in the Middle East have caused oil prices to climb, raising concerns about future market stability.

Published July 05, 2024 - 00:07am

4 minutes read
Singapore
United States
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Oil prices experienced a notable uptick on Wednesday following a larger-than-anticipated draw in US crude stockpiles, heightening market apprehension. The surge is further accentuated by escalating tensions in the Middle East, presenting a complex landscape for investors and analysts alike.

According to Reuters, Brent crude futures saw an increase of 46 cents, or 0.5 percent, reaching $86.70 per barrel by 9:45 a.m. Saudi time. Concurrently, US West Texas Intermediate (WTI) crude futures climbed by 42 cents or 0.5 percent to $83.23 per barrel. The day prior, both benchmarks rose to their highest levels since the end of April during intraday trading but closed down as initial concerns about Hurricane Beryl's impact on Gulf of Mexico production subsided.

Yeap Jun Rong, a market strategist at IG, noted that initial gains driven by fears of supply disruption from Hurricane Beryl might be unwinding as greater clarity on its limited potential impact emerges. Nonetheless, a significant drawdown in US crude inventories provided price support, while ongoing Middle Eastern tensions continue to play a critical role.

Industry data from the American Petroleum Institute (API) revealed that US crude oil inventories fell by a substantial 9.163 million barrels during the week ending June 28, surpassing analysts' expectations of a 700,000-barrel draw. However, gasoline inventories rose by 2.468 million barrels, and distillates decreased by 740,000 barrels, reflecting a complex supply-demand scenario.

Analyst Mitsuru Muraishi from Fujitomi Securities emphasized that while the US crude inventories draw bolstered oil prices, gains were somewhat restrained as some investors sought to capitalize on recent rallies. The Energy Information Administration was expected to release its weekly data later that day, which could provide further market insights.

In the Middle East, escalating conflicts added another layer of unpredictability to the global oil market. Israeli forces bombarded areas in the southern Gaza Strip on Tuesday, resulting in thousands of Palestinians fleeing their homes. Simultaneously, the Israeli military and the Lebanese armed group Hezbollah have engaged in cross-border fire, raising fears of a broader conflict in the region.

Vivek Dhar, an analyst at Commonwealth Bank of Australia, mentioned that the risk of an Israel-Hezbollah war, combined with the potential for a wider conflict in the Middle East, likely presents upside risks to near-term market outlooks. This geopolitical instability could lead to further volatility in oil prices.

Moreover, the Organization of the Petroleum Exporting Countries (OPEC) saw its oil output rise for the second consecutive month in June. A Reuters survey highlighted that increased supply from Nigeria and Iran counterbalanced the voluntary supply cuts made by other members and the broader OPEC+ alliance, complicating the overall production landscape.

Meanwhile, US gasoline demand is expected to ramp up with the onset of the summer travel season and the Independence Day holiday. The American Automobile Association has forecasted that travel during this period will be 5.2 percent higher than in 2023, with car travel up by 4.8 percent, indicating a robust demand for gasoline in the coming months.

In a related development, the global oil market faces challenges from an apparent softness in Chinese demand, which could act as a headwind for crude prices. China, the world's largest crude importer, shows signs of a slower-than-expected recovery, with seasonal refinery maintenance and lower purchasing activity from key suppliers contributing to a lack of vigor in import volumes.

Analyst Mia Geng from industry consultant FGE pointed out that rising crude prices might dampen China's crude-buying appetite, projecting that import volumes could move sideways or even decrease in the later part of the third and fourth quarters. This potential slowdown in Chinese demand adds another layer of complexity to the global oil market outlook.

Overall, these multifaceted factors, ranging from substantial inventory draws in the US, geopolitical tensions in the Middle East, and potential demand softness in China, create a volatile environment for the global oil market. Stakeholders will need to carefully navigate these dynamics to manage risks and capitalize on opportunities.

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