Oil Prices Settle Lower, Yet Achieve Fourth Weekly Gain on Demand Optimism

Oil prices recorded a fourth consecutive weekly gain this past week, despite a decline on Friday. Traders were optimistic about the typical summer surge in energy demand, particularly amid ongoing weather-related supply disruptions.

As of 14:30 ET, crude oil prices fell 1% to $86.54 a barrel, while Brent crude dipped 0.9% to $83.16 a barrel. Crude prices overall were on track for strong performance over the past four weeks, driven by expectations of tightening oil markets in the coming months, although trading activity was relatively low due to the U.S. market holiday on Thursday.

### Demand Optimism and Rig Count Stability

A significant factor contributing to the positive sentiment was the anticipated high travel demand in the U.S., the world’s largest fuel consumer, especially during the upcoming Independence Day week. The optimism was bolstered by data indicating a substantial drop in U.S. gasoline inventories over the past week, as fuel retailers geared up for holiday travel. This week was also expected to see significant reductions in crude oil stockpiles.

On the supply side, the latest report from Baker Hughes indicated that the number of active oil rigs remained unchanged at 479, significantly lower than the 622 rigs active at the end of the previous year, suggesting a cautious stance among drillers in ramping up production.

Analysts from ANZ noted that market sentiment this week was also buoyed by strong mobility indicators and heightened geopolitical tensions in the Middle East. Ongoing concerns over potential supply disruptions, particularly due to rising tensions between Israel and Hezbollah, contributed to a higher risk premium in oil prices.

### OPEC Production and Economic Concerns

However, questions linger regarding whether oil prices can maintain their upward trajectory. Recent reports indicated that OPEC members have increased production, which could lead to a more balanced market later this year. Additionally, worries about slowing economic growth in major oil-consuming nations, particularly the U.S. and China, were heightened by disappointing non-manufacturing purchasing managers index readings.

Hawkish signals regarding U.S. interest rates from the Federal Reserve also added to market caution, with traders awaiting key economic data for further insights.

### Adjustments to Oil Forecasts

According to analysts at Citi, geopolitical factors and extreme weather threats will continue to pose risks for oil prices in the short term, citing conflicts in the Middle East and Hurricane Beryl as examples. Despite current price support in the $80s per barrel, Citi anticipates a potential softening as the year progresses.

Citi underscored that while there are some positive indicators, such as unexpectedly high gasoline demand in the U.S., overall demand trends remain below year-ago levels. They maintained a three-month Brent price target of $82 per barrel, but revised their six to 12-month target downward to $72 per barrel, anticipating a potential supply glut after the summer season.