Oil Prices Surge as Geopolitical Risk and Crude Demand Both Rise

Crude Oil Market: Key Drivers Behind This Week's Price Surge

Light crude oil futures have climbed 2.12% this week, driven by a mix of bullish factors. Geopolitical tensions in the Middle East, an unexpectedly large draw in U.S. crude inventories, and optimistic forecasts for summer fuel demand have all contributed to pushing prices higher. As traders assess these developments against the backdrop of OPEC+ supply management and steady U.S. production growth, the oil market remains finely balanced between supply constraints and recovering demand.

U.S. Crude Inventory Draw: A Bullish Surprise

The American Petroleum Institute (API) reported a significant 9.163 million barrel drawdown in U.S. crude inventories for the week ending June 28. This far exceeded analysts' expectations of a 700,000-barrel draw, providing strong support for oil prices. Larger-than-expected inventory drops typically signal increased demand or reduced supply, potentially driving prices higher. However, the increase in gasoline inventories (up 2.468 million barrels) slightly tempers this bullish signal, suggesting demand may not be uniformly strong across all petroleum products.

Middle East Tensions: Geopolitical Premium Returns

Recent escalations in the Middle East, particularly involving Israel, Gaza, and Lebanon, have reintroduced a geopolitical risk premium to oil prices. The potential for supply disruptions in the oil-rich region and increased uncertainty often lead traders to bid up prices as a precaution. While no immediate impact on oil production has occurred, the situation bears close monitoring as any escalation could quickly affect global supply chains.

Hurricane Beryl: Threat Diminishes, But Season Continues

Initial concerns about Hurricane Beryl's potential impact on Gulf of Mexico oil production have eased, with the storm expected to weaken before reaching the area. While short-term bullish sentiment has faded as the immediate threat diminishes, traders should remain vigilant as the hurricane season progresses.

U.S. Summer Driving Season: Demand Expectations Rise

The American Automobile Association forecasts a 5.2% increase in travel during the Independence Day holiday period compared to 2023, with car travel up 4.8%. Higher gasoline demand typically supports crude oil prices, and increased mobility could signal broader economic recovery, positively impacting oil demand.

OPEC+ Production: Supply Management Continues

Recent data indicates a slight increase in OPEC oil output for June, primarily due to higher supply from Nigeria and Iran. However, this is offset by ongoing voluntary supply cuts from other members. OPEC+'s commitment to managing supply remains a key price support, and traders should watch for any signs of policy shifts or compliance issues within the group.

U.S. Oil Production: Steady Growth Amidst Market Changes

U.S. crude and condensates output from the Lower 48 states (excluding federal Gulf of Mexico waters) reached 10.99 million barrels per day in April, near record levels. Continued U.S. production growth could cap price increases, but efficiency improvements in the sector may allow for sustained output even at moderate price levels, according to John Kemp from Reuters.

Investment Flows: Funds Turning Less Bearish

Recent weeks have seen significant petroleum purchases by hedge funds and money managers, indicating a shift from extreme bearishness to a more neutral stance, Kemp stated. Increased fund buying can provide price support and potentially signal a changing market sentiment. The notable bullish position in European gas oil futures suggests expectations of strong diesel demand.

Weekly Light Crude Oil Futures

Trend Indicator Analysis

The main trend is up. A trade through $86.24 will reaffirm the uptrend. The main trend will change to down on a move through $72.08.

The near-term retracement zone at $76.02 to $73.60 is solid support. It is essentially controlling the short-term direction of the market, offering hope for the bulls and a potential trigger point for a steep decline for the bears.

The new minor range is $86.24 to $72.08. The market is currently trading on the strong side of its pivot at $79.16.

Weekly Technical Forecast

The direction of the Weekly Light Crude Oil Futures market the week-ending July 12 is likely to be determined by trader reaction to $81.54.  

Bullish Scenario

A sustained move over $81.54 will signal the presence of strong buyers. If this creates enough near-term momentum then we could see a further acceleration to the upside with $86.24 the initial target price.

Bearish Scenario

A sustained move under $81.54 will indicate the presence of sellers. If it generates enough downside momentum then we could see a test of $79.16. However, with the trend up, this would probably become another buying opportunity.

Short-Term Forecast:  Bullish

Given current market conditions, we expect crude oil prices to maintain their upward momentum in the near term. Traders should keep a close eye on several key factors: the upcoming EIA inventory data, ongoing Middle East tensions, actual U.S. summer driving demand, OPEC+ compliance with production cuts, and potential hurricane disruptions.

While the overall trend leans bullish, the market remains susceptible to sudden shifts. The delicate balance between supply management efforts and recovering demand could be disrupted by unexpected geopolitical events, surprising inventory reports, or significant economic data releases.

In summary, the combination of shrinking U.S. inventories, heightened geopolitical risks, and anticipated strong summer demand creates a supportive environment for oil prices. However, risks persist. Traders should remain vigilant, monitoring these factors closely to identify potential opportunities and manage risks effectively.

Technically, the uptrend is safe. Despite the possibility of profit-taking reversals, they are not likely to change the trend and more likely to just shift momentum lower, at least temporarily. Furthermore, taking out $86.24 will reaffirm the uptrend and put $92.02 on the radar.