Crude oil prices at two-month highs. What is causing the surge?

The OPEC plus cartel, which includes Russia, agreed to extend most of its deep oil production cuts into 2025 in the latest meeting held in early June. They also announced that the production cuts would be extended by another 2.2 million bpd by the end of September 2024. This decision was to shore up the market amid tepid demand growth, high interest rates, and rising US output. The combined output cut of the cartel is currently a total of 5.86 million barrels per day, which comes to about 5.7 percent of global demand.

Nowadays, the Asian oil demand is one of the key drivers of global oil prices. As per the agencies like OPEC and IEA, China’s oil demand will grow in 2024 when compared to the previous year. However, China’s oil imports in the first half of this year have declined and if there is a somewhat brighter light in Asia, it’s India. Indian crude imports in the first half of 2024 are up about 90,000 bpd compared to the same period last year.

The ongoing Israel-Hamas war has led to increased instability and conflict in the region and poses risks to the oil markets. Worries over potential supply shortages are affecting market sentiments. Earlier, attempts taken by various countries to cool down the tensions have put downward pressure on global oil prices.

The solid summer transport demand and uncertainty over the impact of hurricanes on oil production and consumption in the US also led to a positive outlook. There is a conviction that the US stocks will be drawn in the coming months due to seasonal demand. The hurricane season in the Atlantic started with Hurricane Beryl last week.

However, the latest US IEA report predicts a slower oil demand in the coming years due to energy transition advances. Global oil production is believed to ramp up in the next few years amid easing market strains and pushing spare capacity by major market players. The agency also foresees a well-supplied oil market till 2030 as well.

The agency predicts global oil markets will show a major surplus this decade due to slowing demand growth and surging supplies. Strong demand from fast-growing economies like Asia is set to drive oil use higher but those gains will increasingly be offset by rising EV sales, energy-efficient conventional vehicles, and structural economic shifts.

The ongoing supply-demand dynamics are not promising for the prices. The seasonal demand from the US and the extension of OPEC plus production cut may bring some positive momentum, but it is unlikely to continue as supplies might beat demand in the long run. Nevertheless, traders should cautiously track the ongoing geopolitical crisis, global growth outlook, the performance of the US dollar, and the Fed’s rate cut decisions to set a firm direction on the commodity.

(The author Hareesh V is Head of Commodities, Geojit Financial Services. Views expressed are own)

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