Oil prices have surged to a two-month high, driven by a mix of rising demand during the Northern Hemisphere’s summer driving season and escalating geopolitical tensions in the Middle East.
On Tuesday, Brent crude futures rose 70 cents, or 0.81%, to hit $87.30 a barrel, their highest since April 30.
US West Texas Intermediate (WTI) crude was up 68 cents, or 0.82%, at $84.06 after touching its highest since April 26.
These prices represent the highest close for Brent since April 30 and for WTI since April 26.
Rising demand and geopolitical tensions
The energy market has shown strong performance this week, supported by bullish demand expectations and increasing geopolitical risk premiums related to the ongoing Israel-Hezbollah tensions.
According to analysts at Ritterbusch and Associates, the conflict between Israel and the Iran-backed Hezbollah has raised concerns about a potential all-out war, which could significantly impact global oil supplies.
The current hostilities between Israel and Hezbollah began amidst the broader Gaza war, with fears escalating that the conflict could expand and draw in other regional players, including OPEC member Iran and its Shiite allies in Iraq, Yemen, and Syria. Bob Yawger, director of energy futures at Mizuho, emphasized the risk of a broader regional conflict that could disrupt oil production and supply routes, further straining the global oil market.
Impact of OPEC+ output cuts
Adding to the geopolitical concerns, OPEC and its allies, collectively known as OPEC+, have extended most of their oil output cuts into 2025.
These cuts have led analysts to predict supply deficits in the third quarter, as the transportation sector and demand for air-conditioning during the summer deplete fuel stockpiles. This scenario has contributed to the recent rise in oil prices.
On Monday, the increased demand for fuel led to a significant boost in U.S. oil product prices, with diesel futures closing at their highest in 10 weeks and gasoline futures reaching an eight-week high.
This upward trend reflects the market’s anticipation of continued strong demand and potential supply disruptions due to geopolitical events and natural disasters.
Hurricane Beryl and its potential impact
Natural disasters also pose a threat to oil supply stability. Hurricane Beryl, an extremely dangerous major hurricane, is expected to pass Jamaica and hit the Yucatan Peninsula in Mexico later this week.
The hurricane could then weaken into a tropical storm and enter the Bay of Campeche in the Gulf of Mexico, a crucial region for Mexico’s oil production. Any disruption in this area could further tighten the oil supply, pushing prices higher.
Economic indicators and market expectations
In addition to geopolitical and natural factors, economic indicators also influence oil prices. Data released this week showed that U.S. manufacturing contracted for the third straight month in June, suggesting subdued demand.
However, a drop in the measure of prices paid by factories to a six-month low indicates that inflation might continue to decline.
Investors are keenly watching for signs of when the U.S. Federal Reserve will start cutting interest rates.
This week’s focus includes remarks from Fed Chair Jerome Powell, the release of minutes from the latest policy meeting, and the U.S. nonfarm payrolls data.
The Fed’s aggressive interest rate hikes in 2022 and 2023 aimed to curb inflation by increasing borrowing costs, which can slow economic growth and reduce oil demand.
Hopes for an interest rate cut have kept a floor under oil prices, along with the ongoing geopolitical tensions.
Political developments in Europe
Political dynamics in Europe are also contributing to the current market sentiment.
In France, opponents of the far-right movement are working to form a united front to prevent Marine Le Pen’s National Rally (RN) from gaining government control after its significant gains in a recent parliamentary election.
These political concerns, coupled with the complex geopolitical landscape, continue to create uncertainty in the market, supporting higher oil prices.
The confluence of rising summer demand, geopolitical tensions, OPEC+ output cuts, and potential natural disasters is driving oil prices to their highest levels in two months.
Investors are closely monitoring these developments, along with economic indicators and central bank policies, to gauge the future trajectory of oil prices.
As the situation evolves, the interplay of these factors will likely continue to influence the global oil market.
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