Oil Prices Rise on Summer Demand Optimism Amid Dollar Pressure

Oil Prices Experience Modest Increase Amid Summer Demand Hopes

Oil prices saw a slight uptick on Monday, buoyed by the anticipation that the summer driving season will drive higher demand, particularly in the crucial U.S. market.

As of 08:05 ET (12:05 GMT), Brent Crude rose by 0.5% to $84.78 per barrel, while West Texas Intermediate also increased by 0.5% to $81.12 per barrel.

Positive Trends for Oil Prices Amid Geopolitical Tensions

Oil prices have enjoyed two consecutive weeks of gains, with both benchmarks experiencing an approximate 3% rise last week. This uptick has been fueled by a combination of promising demand signals and deteriorating geopolitical conditions.

Recent U.S. data indicated unexpected declines in oil inventories alongside a boost in gasoline demand, contributing to a more optimistic outlook for crude oil. The escalating risks of an all-out conflict between Israel and Hezbollah, tied to the ongoing situation with Hamas, have raised concerns about potential supply disruptions in the Middle East, leading traders to factor in a risk premium.

Additionally, ongoing skirmishes between Russia and Ukraine, particularly with Kyiv targeting significant Russian refineries, have heightened worries about interruptions in supply.

Analysts at ING expressed support for the oil market, highlighting that a deficit anticipated in the third quarter is likely to tighten oil balances. They noted an increase in net long positions in ICE contracts, which rose by 68,535 lots to a total of 140,221 lots as of the previous Tuesday. They explained, "The movement was driven by new long positions entering the market and short covering."

Moreover, the number of active oil rigs in the U.S. decreased by three to 485 last week, marking the lowest level since January 2022.

Impact of Strong Dollar on Oil Prices Amid Inflation Concerns

Despite the gains, crude prices have faced limitations due to the strength of the U.S. dollar, as traders adjusted their expectations regarding early interest rate cuts from the Federal Reserve. The dollar approached a two-month high against a range of currencies.

A stronger dollar tends to put downward pressure on commodities priced in USD, making crude oil more costly for buyers in other currencies. Support for the dollar has also stemmed from stronger-than-anticipated purchasing managers index (PMI) data released recently.

This week, all eyes are on essential inflation data, which is favored by the Federal Reserve. The upcoming reading, set for release on Friday, is expected to indicate that inflation remains significantly above the Fed’s annual target of 2%, providing the central bank with more flexibility to maintain elevated interest rates.