For the last few weeks, global oil prices have been gaining strength. On Friday, the last working day of June, crude oil settled little changed after retreating from a nearly two-month high. However, for the month, both the crude benchmarks, Brent and West Texas Intermediate, registered gains of around six per cent.

For a change, market sentiments are in positive territory. Bulls appear in control. However, the question remains: how long will the positive sentiment persist?

After one of the most aggressive periods of short selling on record, pushing futures to their lowest levels in months, crude prices have finally surged. Brent crude was trading above $86 per barrel last week. Markets are expecting some positive cue from many fronts. And those may aid markets to strengthen further.

Several reasons are contributing to this change. Reports underline a surge in global crude demand. The US Energy Information Administration (EIA) is reporting a notable decline in its crude inventories, which fell by 2.5 million barrels to 457.1m barrels for the week ending June 14.

A strengthening global crude market prices mean higher petrol prices

Additionally, US gasoline stocks dropped by 2.3m barrels, surpassing predictions of a 600,000-barrel build. Distillate stockpiles, including diesel and heating oil, also decreased by 1.7m barrels against an anticipated rise of 300,000 barrels. This comprehensive reduction in inventories has significantly contributed to bullish sentiment in the oil market.

Gasoline consumption in the US is hitting a post-pandemic high. Late in June, it reached a staggering 9.4m barrels per day. This surge aligns with expectations of 71m Americans hitting the road during the upcoming July 4th holiday. This could further boost gas demand, helping market prices go up further.

Globally too, the short-term consumption signals are strong. James Hyerczyk quoting JPMorgan, reports that, driven by robust summer travel, oil demand across Europe and Asia also increased by 1.4m barrels per day (BPD) last month.

The onset of hurricane season is also contributing to the bullish trend, as Tropical Storm Alberto swept across Mexico and prompted US refiners to stock up on crude, especially on barrels produced in the Gulf of Mexico.

With several countries moving ahead to cut interest rates, signs of a cooling job market in the United States have sparked speculation about potential Federal Reserve rate cuts. The US personal consumption expenditures price index, the Fed’s preferred inflation gauge, was also flat in May, lifting hopes for rate cuts in September.

A decision to cut rates would significantly impact oil prices. Lower interest rates typically boost economic growth and in turn, give a fillip to oil demand.

Geopolitics is also impacting the oil market dynamics. The recent attacks by the Houthis on commercial vessels passing through the Red Sea have heightened the vulnerability of shipping channels in a part of the world that remains crucial to global crude supplies.

The ongoing Israeli military offensive on Gaza now seems on the verge of sucking in other regional powers and conflict may soon widen. The escalating tension between Israel and Hezbollah is bringing the two adversaries close to a full-scale war.

“For weeks, the two parties have been trading air strikes and rocket launches across the Israel-Lebanon border, with the situation escalating last week to the point that they are one concrete strike away from an all-out war declaration,” Oilprice.com said in an editorial piece.

In the meantime, Riyadh has also jumped into the fray, warning Israel not to provoke a war in Lebanon. A Saudi diplomat was recently quoted as specifying there would be no normalisation of Israel-Saudi ties without a just solution for Palestinians, as well.

Crude markets are sensitive to all this, which is adding to the geopolitical premium on oil market prices.

Dependent on imported oil, Pakistan cannot remain oblivious to the changing scenario. This is bad news for Pakistani consumers. Strengthening global crude market prices means higher petrol prices in gas stations.

Yet, in the longer analysis, fundamentals are not strong enough to sustain the rally. As soon as the geopolitical premium goes down, weak overall demand could force a market correction.

Global output increments would also weigh heavily on market sentiments. Output in Brazil, an Organisation of the Petroleum Exporting Countries (Opec) member without any commitment to reduce output, has rebounded from a stunning collapse. This is already complicating the efforts of Opec+ to control global supplies and provide a floor to market prices.

Daily crude output in the South American powerhouse kicked off the year at 3.73m barrels, then plummeted nearly 25pc of its offshore platforms underwent repairs. Now, more than one-third of the deficit has been restored.

And in the meantime, in an election year, Washington cannot afford higher prices at the next-door gas stations. The election dynamics would force the Administration in Washington to go all out to cool down the oil markets.

Despite hot flashes in recent weeks, the long-term crude oil scenario stays gloomy.

Published in Dawn, The Business and Finance Weekly, July 1st, 2024