Oil prices climbed on Thursday, June 27th, 2024, defying expectations as concerns about potential disruptions to global crude supply due to geopolitical tensions in the Middle East and Europe outweighed a surprise increase in U.S. crude oil inventories.
Brent crude futures settled $1.14 higher, or 1.34%, at $86.39 a barrel. U.S. West Texas Intermediate (WTI) crude futures closed up 84 cents, or 1.04%, at $81.74 a barrel. This price increase came despite a report by the U.S. Energy Information Administration (EIA) showing a 3.6 million-barrel weekly jump in crude oil stocks, exceeding analysts’ forecasts of a drawdown. Similarly, U.S. gasoline stocks rose by 2.7 million barrels, against expectations of a 1 million-barrel draw.
Escalating Tensions in the Middle East Threaten Oil Supplies
The primary driver behind the price increase was escalating tensions in the Middle East. Cross-border strains between Israel and Lebanon’s Hezbollah have been on the rise, raising fears that a wider conflict could erupt. Such a conflict has the potential to disrupt oil supplies from major producers in the region, like Iran.
“Any escalation in the Middle East could have a significant impact on crude supplies,” said Panmure Gordon analyst Ashley Kelty.
Further east, Yemen’s Houthi militia targeted a vessel in the Red Sea, highlighting the ongoing instability in the region. The Houthis have been carrying out attacks on ships in the area for months in solidarity with Palestinians.
Russia-West Standoff Clouds Energy Market Outlook
Adding to the risk premium in the oil market was the possibility of a downgrade in relations between Russia and the West. Russia is considering this move due to deeper involvement by the U.S. and its allies in the Ukraine war. A deterioration in relations could disrupt energy supplies from Russia, a major oil producer.
The unexpected build in U.S. crude oil inventories limited the extent of the price increase. The EIA report surprised analysts, indicating ample supply in the U.S. market. Additionally, U.S. gasoline stocks rose unexpectedly, suggesting weaker-than-anticipated demand, particularly concerning as the peak summer driving season approaches.
“The market is worried about a slowdown in demand after the July 4th weekend, which could lead to a price dip following the holiday,” said Tim Snyder, economist at Matador Economics.
Analysts also pointed to data from Dutch consultancy Insights Global showing a rise in independently held gasoline stocks in storage at the Amsterdam-Rotterdam-Antwerp (ARA) refining and storage hub. This suggests limited potential for increased transatlantic U.S. gasoline demand.
Interest Rate Hike Expectations Cast Shadow on Oil Demand
Further tempering the price rally were comments from Atlanta Fed President Raphael Bostic. In a policy essay released on Thursday, Bostic reiterated expectations of an interest rate cut in the fourth quarter of this year, aligning with investor expectations of cuts starting in September.
“These comments suggest the Federal Reserve won’t be looking to stimulate the economy in the near future, which could dampen oil demand,” said John Kilduff, partner at Again Capital.
The interplay between geopolitical tensions and rising U.S. inventories is likely to continue shaping oil prices in the near future. While the potential for supply disruptions in the Middle East and Europe provides upward pressure, ample U.S. stockpiles and expectations of a slowdown in demand later in the summer could cap price gains. The direction of oil prices will also depend on the trajectory of the Russia-West standoff and any potential actions taken by the Federal Reserve.
Source: Reuters
