Oil Prices Poised for Strong June as Geopolitical Tensions Introduce Risk Premium

Oil prices saw an uptick on Friday and are on track for significant gains in June, driven by concerns of supply interruptions in Russia and the Middle East, which largely overshadowed worries about declining demand.

As of 07:55 ET (11:55 GMT), prices rose by 0.4%, reaching $85.58 a barrel for one benchmark and $82.09 a barrel for another.

### Crude Set for June Gains Amid Supply Fears

Both major crude benchmarks are poised to increase by over 6% each this month, as escalating tensions between Israel and Hezbollah in Lebanon raise fears of further disruptions in oil supplies. Additionally, Ukraine’s attacks on key Russian fuel refineries bring to light the possibility of reductions in oil exports from Moscow.

These geopolitical tensions have led traders to put a higher risk premium on oil prices, and there are expectations of tighter oil markets in the coming months due to potential supply disruptions. Furthermore, adverse weather conditions, including heavy rainfall in Ecuador and the threat of a hurricane in the Gulf Coast, could also exacerbate supply issues.

### PCE Data Could Affect Market Sentiment

Growing confidence in an impending easing cycle from the Federal Reserve has contributed to a positive sentiment across markets. Traders are currently assigning a 64% probability to a first Fed interest rate cut in September, an increase from the previous 50% a month earlier. However, this optimistic outlook may be influenced by the upcoming release of U.S. personal consumption expenditure inflation data, which is the Federal Reserve’s preferred inflation measure.

### Saudi Arabia Might Lower August Prices for Asia

On another note, reports indicate that Saudi Arabia may reduce prices for certain crude grades sold to Asia for a second consecutive month in August. This decision, influenced by a decline in the Middle East benchmark, would affect the prices for Asia, which represents approximately 80% of Saudi oil exports. A Reuters survey suggests that the official selling price for Arab Light crude could decrease by 60 to 80 cents per barrel from July, potentially marking the lowest price since April.

### U.S. Producers Under Investigation for OPEC Collusion

Additionally, the U.S. Senate budget committee recently initiated an investigation into 14 domestic oil producers, including major companies, to examine possible coordinated efforts with the Organization of the Petroleum Exporting Countries in manipulating oil prices. OPEC has repeatedly cut production over the past year to support oil prices, though this strategy has only offered limited benefits to the crude markets. Nonetheless, OPEC stated after a June meeting that it intends to maintain current production levels to bolster prices through 2024.