Crude oil prices saw a sharp rebound after hitting a six-month low on Wednesday. Rising demand and ongoing conflict in the Middle East are driving the price increase.
The oil markets rebounded sharply on Wednesday, with the Brent futures at the Intercontinental Exchange rising 2.42% to $78.33 per barrel, and WTI futures at the New York Mercantile Exchange increasing by 2.77% to $75.23 per barrel. Crude prices extended rebounding in the Asian session amid recovering sentiment globally on Thursday, erasing half of their losses in August.
The price jump was triggered by the release of US oil inventory data by the Energy Information Administration (EIA), which showed that commercial crude stockpiles fell by 3.7 million barrels to 429.3 million barrels for the week ending 2 August. This drawdown was significantly higher than analysts’ forecasts of a 1.6 million barrel reduction, marking the sixth consecutive weekly decline.
Near-term crude prices are likely to continue rising due to a softened US dollar, especially as the Federal Reserve is now widely expected to cut interest rates more than twice this year. However, oil markets could be under pressure in the long run due to the global energy transition and decreasing production.
A tight supply at the back of increasing demands
Oil prices slumped to their lowest levels since February amid last week’s global market turmoil. Dip-buying, driven by increasing demand, may have supported the price rebound. US stockpiles have been decreasing since mid-June, coinciding with the summer travel season in the Northern Hemisphere.
Additionally, stockpiles of oil products at the UAE’s Port of Fujairah declined by 5.9% to a one-month low by the week ending 5 August. Exports in the region almost doubled, according to Fujairah data. A report from S&P Global indicates that the region’s product shipments to Singapore are set to rise to one million barrels from 312,000 barrels in the week beginning 29 July.
According to a report by the EIA, OPEC+ production cuts will reduce global oil inventories over the next three quarters and push oil prices higher. In June, OPEC and its allies agreed to extend production cuts of 3.66 million barrels per day until the end of 2025, with additional voluntary cuts of 2.2 million barrels per day extending until September this year.
The organisation, which produces over 37% of the world’s total oil supply, has been cutting output since 2022, with a total reduction of 5.86 million barrels per day, representing 5.7% of global demand.
According to Baker Hughes, the worldwide oil rig count decreased by 106 for the week ending 24 July compared to a year ago. The US saw the biggest decline, with 86 fewer rigs, while Canada increased its rig count by 8 from the same month last year.
Rising Middle East conflicts
The tension in the Middle East remains a bullish factor for oil prices, as any escalation could cause a supply disruption. Israel is anticipating a military attack by Iran following the assassination of a Hamas leader, raising concerns that rising tensions could escalate into a wider regional conflict.
Meanwhile, oil shipments continue to be attacked by the Houthi military group in the Red Sea, forcing containers to detour via the Cape of Good Hope, which takes seven to ten days longer. According to a Bloomberg report, the Red Sea crisis is expected to extend into 2025, leading to rising shipping costs.
China’s imports tumble
However, not all news is favourable for the oil price rally. China, the world’s biggest oil importer, saw its crude imports drop to 10.01 million barrels per day in July, the lowest since September 2022. This data suggests that China continues to experience sluggish domestic demand, offsetting increasing fuel demand elsewhere globally. Analysts believe this decline points to a year-on-year import drop in 2024, with expectations that crude imports could fall by 150,000 to 200,000 barrels per day.
Additionally, the renewable energy transition is contributing to the decreasing demand for fossil fuels. According to the China Passenger Car Association (CPCA), the penetration of new energy vehicles (NEVs) in the retail market accounted for 51% in July, the first time it has exceeded half of the market share.
In the long term, oil markets could be under pressure due to the global energy transition and decreasing production. However, near-term crude prices will likely continue to move upward due to a softened US dollar, especially since the Federal Reserve is now widely expected to cut the interest rates more than two times this year.
