Tensions in the Iran-Israel conflict have eased, and the oil market has largely avoided any significant supply disruptions. On top of that, the IEA doubled down on its mid-June forecast that demand will stabilize by the end of the decade. Given all this, it’s no surprise that oil prices have dropped back below $70.
This is only good news for oil-importing countries, since lower prices mean lower spending and greater economic benefit. But for exporters, the opposite is true. Naturally, one would have expected OPEC+ to take steps to boost prices again, for example by keeping production stable at its July meeting.
But the complete opposite happened: contrary to logic, the cartel not only increased the number of barrels produced per day, but to a higher figure than many had expected: 548,000 barrels per day, instead of the 411,000 previously planned. In addition, another equal increase could be announced for September.
It might be thought that this has been done to discipline members such as Kazakhstan, which have been exceeding their production quotas. And it would make sense if oil prices were to fall as a consequence, but the complete opposite happened: after an initial decline, a barrel of Brent rose to $69 a barrel on Monday.
As for the stock market reaction, indexes including the S&P 500 and the Nasdaq went red on Monday. But it was not due to fears that rising oil prices would fuel inflation and slow the Fed's path of rate cuts. Rather, the drop came on disappointing news about tariff negotiations with South Korea and Japan.
Why was this decision made, and why did prices rise?
Starting with the first question: according to OPEC+, the decision to increase production was based on a “stable global economic outlook and currently healthy market fundamentals”. But it is unclear where this optimism comes from, given that major trade disputes remain unresolved and the Fed is in no hurry to cut interest rates.
As for the second question, prices may have risen in response to Saudi Aramco's $1 per barrel increase in its Arab Light crude, which puts it $2.20 above the regional benchmark for Asian buyers. Hopes for progress in trade negotiations may also have played a role. If so, the basis for further price rises looks rather shaky.
Thus, logic suggests that prices are likely to fall unless a new geopolitical crisis hits a region critical to oil supply.
The continued decline in the number of active drilling rigs in the United States, despite Donald Trump's calls to “drill, baby, drill,” also suggests that shale producers are not feeling bullish about the market. As for investment bank analysts, many expect oil prices to fall back toward $60 per barrel in the fourth quarter.
But, as always, the market may still hold some surprises.
This article was written by FL Contributors at www.forexlive.com. Read More Details
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