With the summer driving season just around the corner, the oil price is becoming increasingly interesting to both investors and ordinary market participants. Despite a deterioration in geopolitical stability across the key producing region of the Middle East, oil prices have managed to remain within a relatively narrow band over the past two months. That said, Brent crude oil's recent price of $63.90 is still more than 15% down from 1 April and close to the local low of $60.23 not previously seen since the height of the pandemic lockdowns in 2021. It's been a similar story for WTI and Light Sweet, which were at $62.97 per barrel on 29 May.
Between Trump's tariffs, recession fears, and sticky inflation, it's been challenging for oil to gain a foothold despite the geopolitical factors that would ordinarily lift the resource. Add to that OPEC+'s recent price control moves, and we can see how supply and demand forces have been cancelling one another out over recent weeks. But what additional factors are driving the oil market right now, and where is it likely headed over the summer and beyond?
More than just supply
Like any market, crude oil is a complex ecosystem that is affected by a variety of factors beyond simple supply and demand. The geopolitical situation and domestic economic politics are both incredibly important, and the combination of ongoing and growing uncertainty in both the Middle East and Eastern Europe has implications for both the supply and demand side. The fear of inflation remains for the Fed, and this is delaying the rate cut that many believe the market needs to spur on a new wave of demand.
Despite coming in below expectations and at its lowest level since 2021, the 2.3% year-over-year inflation rate in April's Consumer Price Index is still above the Fed's 2% target. In addition to that, the regulator would first like to see what happens with Trump's Liberation Day tariffs before committing to lower rates. One positive development in this direction was the ruling by a US court on 28 May that the majority of Trump's paused reciprocal tariffs are unconstitutional. The ruling boosted risk appetite and expectations of an uptick in industrial demand, and it's hoped that this could allow the Fed to consider a modest rate cut. More recently, data from the American Petroleum Institute released on 28 May showed that US oil inventories shrank by 4.24 million barrels (mb) over the past week amid expectations of an added 1 mb. This has given cause for optimism as it suggests demand is strong and outstripping supply, which, combined with the other factors above, could lead to higher prices in the short term. However, preliminary economic data show that the US economy shrank by 0.3% in Q1 2025. As such, fears of a recession could keep the oil bulls in check.
OPEC+ at it again
Famous for its manipulation of oil markets, the OPEC+ cartel made headlines again after raising output for a second consecutive month, boosting production in June by 411,000 barrels per day. With the summer driving season close at hand, it would make sense to increase output, but some analysts were concerned that this was foreshadowing a coordinated effort to tank prices, as was seen in 2015. US shale oil producers need prices above $60 per barrel to be viable, and this wouldn't be the first time OPEC had taken advantage of a weak market by using oversupply to force prices below their break-even point.
As the group prepares for its next meeting on 31 May, there's no real consensus on what should be expected. Some sources affirm that output will be left unchanged, while others suggest a modest increase. Three anonymous OPEC sources told Reuters on 27 May that another massive 411,000 bpd hike could even be on the cards. According to refiners, Saudi Arabia is tipped to lower its official oil prices for July to their lowest levels since January in response to the increased output, which would provide a solid stream of cheap and easily accessible oil to the huge Asian market. It certainly seems as if the EU and UK are anticipating significant price drops in the near term, with the two economic powerhouses pushing the US to lower the price cap on Russian oil from $60 to $50 a barrel. We will need to wait for the OPEC+ meeting for more clarity, but it certainly seems that supply will be strong. The question is whether demand will be able to keep up.
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