Oil Prices Rise 3% to One-Week High Amid Hopes for Increased Summer Fuel Demand

By Scott DiSavino

Oil prices increased by approximately 3% on Monday, reaching a week-long high. This rise was driven by optimism surrounding fuel demand during the summer months, even in the face of a stronger U.S. dollar and expectations that the U.S. Federal Reserve will maintain higher interest rates for an extended period.

In an effort to combat inflation, the Federal Reserve raised interest rates significantly throughout 2022 and 2023. These elevated rates have led to increased borrowing costs for consumers and businesses, potentially hindering economic growth and decreasing oil demand. Additionally, a stronger dollar can diminish oil demand by making dollar-priced commodities more costly for those using different currencies.

Brent crude futures climbed by $2.01, or 2.5%, closing at $81.63 per barrel, while U.S. West Texas Intermediate (WTI) crude rose by $2.21, or 2.9%, finishing at $77.74. Both crude benchmarks reached their highest closing prices since May 30.

Analysts at energy consulting firm Gelber and Associates noted that futures prices are rising due to strong expectations for summer demand, despite the overall economic outlook being somewhat less hopeful than in previous weeks. Goldman Sachs analysts predict that Brent crude will hit $86 per barrel in the third quarter, citing robust summer transportation demand that could lead to a third-quarter deficit of 1.3 million barrels per day.

Meanwhile, the U.S. dollar appreciated to a four-week high against a range of other currencies, influenced by a sharp decline in the euro amid political instability in Europe after far-right parties made gains in the European Parliament. This situation prompted French President Emmanuel Macron to call for a snap national election.

Last week, oil prices experienced a third consecutive weekly drop due to concerns about a plan by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, to start unwinding some production cuts in October, potentially resulting in increased supply. Despite OPEC+ production cuts, oil inventories have grown recently, with crude and gasoline stockpiles both rising.

Energy consultancy FGE remains optimistic, suggesting that oil prices could surge to the mid-$80s in the third quarter, while emphasizing the need for clearer signs of tightness in the market based on early inventory data.

LOOKING AHEAD

Investors are now focused on the upcoming release of the U.S. consumer price index data for May, scheduled for Wednesday, which may provide insights into when the Federal Reserve might begin lowering interest rates. Additionally, the conclusion of the Fed’s two-day policy meeting is anticipated on the same day, where it is widely expected that the central bank will keep rates unchanged.

Following recently stronger-than-expected employment data, market expectations for Fed rate cuts in September have diminished, with projections now indicating less than a 50% likelihood of a reduction. Just a week prior, expectations had peaked at 69%.

Traders have also revised down their predictions regarding the extent of Fed easing for the current year, now anticipating just one rate cut compared to two before the payrolls data was released.

Furthermore, the market is awaiting monthly oil supply and demand reports from the U.S. Energy Information Administration (EIA) and OPEC on Tuesday, as well as a report from the International Energy Agency (IEA) on Wednesday.