Oil prices surged approximately 3% to reach a one-week high on Monday, bolstered by expectations of increased fuel demand during the summer season, despite challenges posed by a stronger U.S. dollar and the anticipation that the U.S. Federal Reserve will maintain higher interest rates for an extended period.
The Federal Reserve’s aggressive interest rate hikes in 2022 and 2023 aimed to curb inflationary pressures. However, the resultant higher borrowing costs for both consumers and businesses could potentially dampen economic growth and subsequently reduce the demand for oil.
Simultaneously, a robust U.S. dollar could diminish oil demand by amplifying the costs of dollar-denominated commodities like oil for holders of other currencies.
Brent futures surged by $2.01, marking a 2.5% increase to settle at $81.63 per barrel, while U.S. West Texas Intermediate (WTI) crude climbed by $2.21, representing a 2.9% rise to settle at $77.74. This closing price for both crude benchmarks marked the highest since May 30.
In a note, analysts at energy consulting firm Gelber and Associates highlighted, “Futures are higher as expectations of summer demand are supportive of prices … despite the broader macro landscape remaining less optimistic than weeks previous.”
Goldman Sachs analysts expressed optimism, projecting Brent to climb to $86 a barrel in the third quarter. They emphasized that robust summer transportation demand is expected to drive the oil market into a third-quarter deficit of 1.3 million barrels per day (bpd).
Meanwhile, the U.S. dollar surged to a four-week high against a basket of other currencies, with the euro experiencing a sharp decline due to political uncertainty in Europe. This uncertainty stemmed from the gains made by far-right parties in the European Parliament elections, prompting a call for a snap national election by French President Emmanuel Macron.
Last week, concerns regarding a plan to ease some production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, contributed to oil’s third consecutive weekly loss. Despite the ongoing efforts of OPEC+, oil inventories have continued to rise, with both U.S. crude and gasoline stocks increasing in the latest week.
Energy consultancy FGE remains optimistic about oil’s trajectory, expecting prices to rally further, potentially reaching the mid-$80s in the third quarter.
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