Since the last Dragon Boat Festival, oil prices have grabbed the market’s attention. Although OPEC+ has agreed to increase production plans, the market still believes that the short-term crude oil supply cannot meet the current demand, especially during the summer. In addition, the markets expect to see a higher demand for crude oil, driven by the resumption of work and production activities in Shanghai, China. As a result, the need for crude oil will gradually increase, pushing oil prices higher. Will oil prices continue to climb in the future? Today, oil prices are bullish, but we cannot rule out the possibility of a temporary pullback.
At the OPEC+ meeting on June 2, OPEC+ members agreed to increase production by an average of 648,000 BPD in July and August, deviating from their standard monthly increase of 432,000 BPD for the first time. This means that OPEC+ has realised that the summer peak crude oil demand is coming. Still, the increase in production is quite conservative, as seen from the market’s subsequent reaction. Still, the higher production could prevent the record-high oil prices from soaring further.
From an investment perspective, whether it is the demand or supply side, with the resumption of work and production in Shanghai, China, and the recovery of the Asian economy, the demand for crude oil has risen sharply. A rebound in Asian crude oil orders has pushed Saudi Arabia’s oil prices higher than expected. Aramco raised the price of its primary Arabian light crude oil for Asian customers by $2.10 to $6.50 a barrel in June.
The US and EU sanctions on Russian oil have created a partial embargo, leading to a ban on Russian oil exports to the EU, cutting over two-thirds of Russian oil imports. By the end of the year, 90% of Russian oil imports to the EU will be banned, and the northern pipeline of the Friendship Pipeline, which carries crude oil from Russia to Central and Eastern European countries, will stop supplying oil to the EU.
Officials expect the EU’s ban on imports of Russian seaborne crude oil and petroleum products to take 6-8 months to implement fully. After this, Russia will have to sell its crude oil and refined products in new markets. In the face of a sharp decline in Russian crude oil supplies, many expect the EU sanctions to reduce global oil exports by 20%. In the short term, the market will be challenged to fill the gap caused by the Russian crude oil production cut; hence, oil prices may rise further. The trend may continue as the global crude oil markets readjust the supply and demand balance.
However, as China and India continue importing Russian crude oil, they could be the new markets for Russia’s crude oil. Hence, the magnitude of the surge in crude oil prices may be limited. Furthermore, European sanctions are likely to fall short of expectations, which would intensify the crude oil supply shortage on the European continent.
On the other hand, the US is about to enter the peak summer oil consumption season. The country may face significant challenges after its commercial crude oil inventories, excluding strategic reserves, fell more than expected on May 27. Refined crude oil and gasoline inventories recorded steep declines, reflecting the tight US crude oil supply. Not only has domestic demand increased, but external demand has also risen. Due to the European sanctions against Russia, the US crude oil has expanded its supply and exports to Europe. However, the United States is currently releasing its strategic oil reserves, making it difficult to alleviate the inventory shortage.
It is more worrying that Russia may reduce its oil production in the coming months. Therefore, the higher oil production targets by the OPEC+ may not be enough to fill the gap caused by the sanctions against Russia. In addition, many OPEC+ members are struggling to meet the current production targets and may struggle to meet the higher targets set this month. For example, the 23 OPEC+ members did not reach their production quota of 2.59 million barrels per day in April, increasing the market’s doubts about the group’s future production capacity. Therefore, negative market sentiment may further push crude oil prices higher.
Subsequently, investors should pay attention to the Fed’s interest rate decisions, especially if the Fed decides to raise interest rates. As the probability of energy prices and costs rises again, the Federal Reserve may implement some measures to restore price stability. If the dollar continues rising due to interest rate adjustments, it may trigger a correction in oil prices. But for now, the short-term demand outstrips supply, and bullish crude oil prices still dominate the market.
