3-Week Rally: Oil Prices Extend Gains As Fundamentals Come Into Focus

Over the past few weeks leading up to mid-July, oil prices extend on an upward trajectory, defying economic headwinds and predictions of weakened oil demand growth.

As we approached the end of another trading week mid-July of this 3-week rally, Brent crude was inching closer to the $81 mark, while West Texas Intermediate (WTI) was being traded at $76.41 per barrel.

The positive sentiment in the oil markets can be attributed to various factors, including supply disruptions in key producing nations and signs of lower Russian oil exports. Despite a reduction in oil demand growth forecast by the International Energy Agency (IEA), the fundamentals of the market are gaining traction and capturing the attention of traders worldwide.

Bullish Sentiment Prevails as oil prices extend during a 3-Week Rally

Despite concerns about slower economic growth impacting oil demand, market sentiment remains bullish as traders focus on the broader picture. The IEA, in its recent Oil Market Report, revised its oil demand growth projection downward by 220,000 barrels per day (bpd) from last month’s estimate. This revision was prompted by the persistent macroeconomic headwinds, particularly a deepening manufacturing slump that has dampened demand prospects.

However, it’s worth noting that the agency still foresees a record-high global oil demand in 2023, expected to reach 102.1 million barrels per day. The slight revision in growth estimate is not enough to outweigh the positive factors driving prices up, particularly in a tight-supply environment.

Supply Disruptions Fuel Optimism

One of the key drivers behind the bullish sentiment in the oil markets is the supply disruptions experienced in some major oil-producing nations. Libya, a significant oil exporter, has faced disruptions to its production, contributing to a tighter supply environment. Additionally, Saudi Arabia’s production cut and signs of lower Russian oil exports have further bolstered traders’ confidence in the upward trend of oil prices.

OANDA senior analyst Edward Moya expressed, “Crude prices are getting a boost from expectations that the oil market will get very tight as Libya and Nigeria deal with disruptions, also while Russian crude exports finally decline.”

The tighter supply situation has provided some cushion to oil prices, preventing them from being severely impacted by the IEA’s downward revision of oil demand growth. As a result, the oil benchmarks have managed to sustain their positive momentum, delivering a 3-week rally of gains this month.

The Impact of Economic Indicators

Amidst the various factors influencing oil prices, economic indicators have played a crucial role in shaping traders’ perceptions. In the United States, lower-than-expected inflation figures have stimulated expectations of increased oil demand. In a tight-supply environment, any indication of higher demand can have a bullish effect on oil prices.

Traders are closely monitoring the evolving economic landscape, as any improvement or worsening in economic conditions could sway the demand for oil, influencing prices accordingly. Furthermore, geopolitical developments and policy decisions in major economies are also being closely watched for potential effects on the oil market.

Looking Ahead: Remaining Bullish on Oil

Despite the recent economic headwinds and the IEA’s downward revision of oil demand growth, many market analysts and experts remain optimistic about the future trajectory of oil prices. The Commonwealth Bank of Australia’s head of commodities, Vivek Puri, expressed confidence in the oil balance looking increasingly tight for the remainder of the year, leaving room for prices to potentially rise further.

Traders are keeping a close eye on both the supply and demand factors that could shape the oil market in the coming weeks. The supply disruptions in Libya and Saudi Arabia’s production cuts are expected to continue influencing oil prices. Meanwhile, any signs of economic recovery or potential policy changes may lead to increased oil demand, further supporting the upward momentum.

Conclusion

As the trading week comes to a close, oil prices are basking in the glow of their 3-week rally of gains this month. Bullish sentiment persists in the face of economic uncertainties and the IEA’s revised oil demand growth forecast. Supply disruptions in key producing nations and indications of lower Russian oil exports have provided a strong foundation for the current oil price rally.

Looking ahead, traders remain cautiously optimistic, closely monitoring economic indicators, geopolitical developments, and supply dynamics that could steer oil prices in either direction. The fundamentals of the oil market are now at the forefront of traders’ minds, reminding them that despite short-term fluctuations, the long-term outlook for oil remains robust.

Sources:

Slav, I. (2023, July 14). Oil Prices Extend Gains As Fundamentals Come Into Focus. OilPrice.com. https://oilprice.com/Energy/Energy-General/Oil-Prices-Extend-Gains-As-Fundamentals-Come-Into-Focus.html