Oil is the lifeblood of international trade and industry, and any disruption to supply can have far-reaching economic implications. Following rising geopolitical tensions in Europe and subsequent sanctions on Russia in 2022, the EU and UK were left with a supply shortfall that resulted in crude oil's price rising over $100 a barrel for nearly four months. Now, in light of the latest flare-up in the Middle East beginning 7 October 2023, the stability of the oil supply has been under constant threat, with oil production facilities and key trade routes prime targets for all involved parties. Brent has traded in a wide range since then, from a low of $61.41 up to a high of $93.04 per barrel. Just this past month, the animosity between major regional power brokers Iran and Israel reached a fever pitch as negotiations stalled and a hot conflict broke out between the two nations. This saw the flagship crude price rise almost 25% in the space of just three weeks.
Brent has since traded within a range of $69.05 a barrel and $66.34 since 25 June, as concerns of supply disruptions in the Middle East producing region subsided on the welcome ceasefire between Iran and Israel. But the proactive stockpiling of major economies like the US, China, and the EU could risk price drops below the key resistance level of $60.00. Add to that the unofficial overproduction by countries like Kazakhstan and Saudi Arabia and the likely OPEC+ output increases to come, and the bearish signals start to really pile up.
Overcompensating for something
After an all-out war began between Israel and Iran on 13 June, Tehran stated its intention to close the key oil shipping lane of the Strait of Hormuz. Meanwhile, oil extraction and refining facilities both in Iran, Israel and the wider region became prime targets for both belligerents' militaries. Having been caught out majorly by rapid increases in the oil price during the summer 2022 and, to a lesser extent, in the spring of last year, the world's major economies began stockpiling oil in earnest to avoid a shortage and minimise the effects of temporarily higher prices amid rising geopolitical tensions in the key producing region of the Middle East. For instance, Chinese imports of Iranian oil increased significantly in June, as a result of accelerated shipments ahead of the escalation of the conflict and increased demand from independent refiners. According to data from ship tracking company Vortexa, China purchased over 1.8 million barrels of Iranian oil per day during the period 1–20 June, a record according to the firm's data.
Meanwhile, data from the American Petroleum Institute late on Tuesday, 1 July, showed US crude oil inventories rose by 680,000 barrels during the week prior to this date. This is at a time when stockpiles typically show a drawdown on account of the summer driving season. Now that the 12-day war is at an end following a Trump-brokered ceasefire, we are beginning to see a reversal of this trend. Indeed, data from the US EIA from 25 June showed crude oil and fuel stocks down, while refining activity and demand grew. This suggests that prices should remain relatively stable as long as the increased supply and demand are able to counterbalance one another. That, however, will rely heavily on the actions of the oil-producing cartel OPEC+ and the general economic health of the world's two biggest economies.
Turning up the taps
As the next OPEC+ meeting date of 6 July approaches, investors are waiting with bated breath to find out the group's August production levels. According to analysts at ING, it is highly likely that the cartel will continue to ramp up production to wipe out entirely the 2.2 million barrels per day (bpd) cut it announced back in 2022. In their report, they opined that "these larger supply increases should leave the global oil market well supplied for the remainder of the year. It's set to return to a large surplus in the fourth quarter of this year". It is expected that the final increase will be in the region of 411,000 bpd, which is no insignificant hike, given the ever-present risk of Trump tariffs entering into effect before the current month is out in the absence of any firm trade deals having been announced.
What's more, rogue OPEC+ members like Kazakhstan are pushing up supply even further, albeit unofficially. According to figures reported by Reuters, the central Asian producer's crude output increased by 7.5% in June to reach 1.88 million bpd, the same level as Kazakhstan's all-time high set in March. This means that Kazakhstan is outputting well in excess of its official OPEC+ quota of 1.5 million bpd in what has now become months-long noncompliance. Giving an overview of the situation, Phillip Nova senior market analyst Priyanka Sachdeva said, "Today's oil price moves are being pushed by the interplay of potentially rising OPEC+ supply, confusing US inventory signals, uncertain geopolitical outlook, and macro-policy ambiguity". And with the war premium now gone following the ceasefire between Israel and Iran, the only exogenous factor exerting upward pressure on oil prices is the weaker US dollar. Unless demand is not only sustained but increases sharply, it's hard to see a path back up towards $70 for crude.
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