In the past two years, international oil prices have fluctuated between $70 and $90 per barrel. Despite factors such as worsening geopolitical conflicts in the Middle East, the ongoing Red Sea crisis, reduced summer inventories, and unclear US monetary policy prospects, the oil price trend tends to self-correct after brief fluctuations, manipulated by the invisible hand of the market, returning to equilibrium.
Why Oil Prices Don’t Drop
Seasonal Demand
Summer is typically the peak driving season, with strong gasoline demand usually driving up oil prices. The American Travel Association predicts a record 71 million Americans will travel over the weekend of July 6, surpassing pre-pandemic travel numbers. This high demand has been a primary reason for the recent continuous rise in international oil prices. Market analysts believe that international oil prices may reach $90 per barrel this summer.
Other Seasonal Factors
Hurricanes also play a role. Currently, Hurricane Beryl is ravaging the southeastern Caribbean. While it is unlikely to directly threaten the key oil and gas infrastructure in the upstream and downstream of the US Gulf of Mexico, a very active hurricane season usually disrupts oil and gas production along the Gulf Coast.
Inventory Reduction
Reduced inventories also boost oil prices. The US Energy Information Administration estimates that by the end of June, crude oil inventories will have significantly decreased by 12.2 million barrels, with fuel inventories also decreasing. The American Petroleum Institute believes that if weekly inventory declines reach 9 million barrels, oil prices will remain at a two-month high.
OPEC’s Role
A crucial reason for the resilience of international oil prices is OPEC’s production cuts. As refineries ramp up capacity to meet summer demand, OPEC and Russia’s crude oil exports have decreased, leading to tighter-than-expected market supplies. Recent data shows global oil exports decreased by 1 million barrels per day last month, with Saudi Arabia accounting for half of this reduction. Exports from Gulf countries and Iraq also fell, partly due to the ongoing summer heatwave depleting summer crude oil consumption.
Investor Sentiment
Currently, Wall Street seems to believe that rising oil prices will continue for a longer period. Standard Chartered Bank, a notable “bull,” released a research report indicating that London Brent crude oil futures prices are expected to break through $90 per barrel this year. The bank’s forecast is based on the fundamentals of supply and demand, predicting a global oil supply shortage in the third quarter, extending into the fourth quarter, further pressuring inventories. In the short term, technical price indicators and oil price levels are the most important bullish catalysts.
Why Oil Prices Don’t Rise
Limited Demand
Firstly, limited demand restricts oil price increases. In a recent report, the International Energy Agency predicted that oil demand growth will peak within less than six years. Accurately predicting future oil demand and supply relationships is nearly impossible, but some trends are worth noting. For instance, the once-booming US oil production has shown signs of slowing down recently, while Asia’s oil import demand continues to rise. By 2045, the energy structure of major economies will primarily be composed of non-hydrocarbon energy. These complex factors, combined with the weak global economic outlook, suggest that demand growth may peak within two to three years.
Supply Side Dynamics
The supply side dynamics are intriguing. Despite commitments from OPEC+ (OPEC and non-OPEC oil producers), OPEC oil production continues to rise. A market survey showed that in June, OPEC’s 12 oil-producing countries produced 26.7 million barrels of crude oil per day, an increase of 70,000 barrels from May. Nigeria’s daily oil production increased by an estimated 50,000 barrels. Additionally, Iran, not bound by OPEC+ agreements, saw its June oil production rise to 3.2 million barrels per day, the highest in five years. Iraq, OPEC’s second-largest producer, although its daily oil production decreased by 50,000 barrels last month, continued to exceed its production quota by nearly 200,000 barrels per day.
OPEC’s Future Actions
This raises the question: if international oil prices struggle to break through $90 per barrel for an extended period, will OPEC intervene with further production cuts? At the beginning of June, OPEC+ extended the daily production cut agreement of 3.66 million barrels until the end of 2025 and announced an additional daily production cut of 2.2 million barrels until the end of September 2024. These cuts account for about 5% to 6% of global oil demand. Saudi Arabia and Russia, the two major price drivers within the OPEC+ alliance, have been pursuing higher oil prices to help balance their domestic budgets. Experts suggest that Saudi Arabia needs oil prices at $96.17 per barrel to balance its budget by 2024, while Russia might need prices to reach $115 per barrel. For now, reducing production to raise prices seems to be the only option, which clearly conflicts with the goals of major international oil-consuming countries.
Impact of Electric Vehicles
Finally, the impact of electric vehicle (EV) adoption is a complex issue. Although the EV market has seen some fluctuations in the short term, the long-term trend remains towards broader EV adoption. This year, global EV adoption has slowed. Tesla’s second-quarter deliveries fell short of expectations; although General Motors’ EV sales grew by 40%, they are still selling at a loss. Consumer preferences are also changing. According to a McKinsey survey, nearly half of US EV drivers are willing to switch back to internal combustion engine vehicles, with 29% of respondents in other developed countries sharing this sentiment. This suggests that the impact of EV development on oil demand might not be as rapid as imagined.
The US Energy Information Administration predicts that the increase in EV usage, new clean energy technologies, and broader energy efficiency policies collectively depict a growth curve for oil demand, expected to stabilize by 2030.
