• U.S. crude prices spike as summer demand rises
• U.S. oil production is flattening
• OPEC+ extended output cuts of 3.66 million bpd until 2025
• Geopolitical tensions in the Middle East are once again affecting crude prices.
• Hurricane season also poses a risk to Gulf Coast oil infrastructure.

Anticipated Surge in Summer Demand Drives Crude Prices Higher

Crude oil prices gained approximately 16% over the past month driven by optimistic expectations of rising demand during the Northern Hemisphere’s summer driving season. Additionally, concerns about escalating conflicts in the Middle East potentially disrupting global oil supplies have contributed to the price increase.

U.S. Crude Oil Production Stagnates

According to the latest data from the U.S. Energy Information Administration (EIA), nationwide crude and condensate production reached nearly 13.2 million barrels per day (b/d) in March 2024. Despite this significant output, there has been no net growth since October 2023, indicating that the surge in production following the end of the coronavirus pandemic and Russia’s invasion of Ukraine has plateaued.

Price Stability and Production Outlook

West Texas Intermediate (WTI) crude prices averaged $73-83 per barrel since February 2024 and do not provide a strong encouragement to either boost or cut production. If prices in the medium-term remain steady, U.S. output is likely to remain flat for the remainder of 2024 and at least through the first half of 2025.

Range bound prices and flat growth in U.S. production have allowed OPEC+ to increase some of their production later in 2024.

OPEC+ Extends Production Cuts Until 2025, influencing Global Supply

In early June, OPEC+ announced the extension of its 3.66 million barrels per day (bpd) production cuts through the end of 2025. Additionally, another 2.2 million bpd cut will extend until the end of September 2024. Combined, these cuts represent approximately 6% of global oil demand and are expected to create supply deficits in the third quarter as higher summer demand would deplete stockpiles.

The prolonged production cuts by OPEC+ are anticipated to exert upward pressure on crude oil prices, particularly as supply tightens and seasonal demand peaks.

Renewed Middle East Tensions Support Crude Prices

Increasing geopolitical risks, particularly involving Israel and Hezbollah, continue to bolster oil prices. Escalating tensions have heightened fears of a broader conflict that could involve Iran more directly. Iran, responsible for about 3 million barrels of oil production per day, accounts for roughly 3% of the world’s output. The potential for conflict to disrupt this supply adds a significant risk premium to oil prices.

Impact of Hurricane Season on Crude Oil Prices

The start of the Atlantic hurricane season, marked by Hurricane Beryl, highlights the vulnerability of oil and gas infrastructure to natural disasters. Potential disruptions to production and consumption in the Americas could further tighten global supply and influence prices.

Hurricane Beryl, the first major storm of the season, poses a potential threat to oil and gas production in the Gulf of Mexico. Classified as a Category 4 storm, Beryl is projected to hit the Yucatán Peninsula on Friday and could disrupt U.S. refining and offshore production. The path of the hurricane will determine the extent of its impact on the energy industry.

Mixed Economic Signals from China

China, the world’s second-largest oil consumer and top crude importer, presents a mixed economic picture. While smaller manufacturers have experienced the fastest factory activity growth since 2021 due to overseas orders, broader surveys indicate weak domestic demand and trade frictions. This discrepancy raises questions about the accuracy of official figures and the true state of industrial activity.

A Bullish Outlook in The Short-Term Despite Uncertainties

The combination of expected supply deficits in the third quarter of 2024, rising seasonal demand, and heightened geopolitical tensions in the Middle East, point to a bullish outlook for crude prices in the short-term. Despite global economic challenges and mixed signals from China, crude prices are likely to continue to trade higher in the coming months.

Source: TradingView

Technical Analysis

WTI prices have been trading in a wide range between $70.00 and $87.00 throughout 2024. After finding a solid support at $72.50 in early June crude rebounded strongly, breaking decisively above its minor resistance of $80.60. This suggests the decline from the April high is over and that higher price levels are likely to unfold in the coming months.

Given the impulsive nature of the current rally, we are expecting to see a re-test of the $87.00 level. The weekly Relative Strength Index (RSI) indicator has found support at 44% after the latest sell-off, suggesting that momentum conditions are improving, and that oil could subsequently break above its key resistance of $87.00. Such development would have bullish implications for the price of WTI and could extend the rally to $92.00 – $93.00 in the long-term.

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