Crude Oil Prices Plummet as Trade Tensions Escalate and Energy Demand Falters
The oil market has been experiencing a significant downturn, with August WTI crude oil falling by 2.15% and August RBOB gasoline declining by 0.99% last Monday. This decline came after the US dollar index surged to a 2.5-week high, exerting bearish pressure on energy prices.
Despite Monday's rally in the dollar index, crude oil prices had initially climbed to a 3-week high due to concerns that President Trump might announce new sanctions on Russian energy exports, which could curb global oil supplies. However, when Mr. Trump announced a 50-day wait period for a possible ceasefire in Ukraine, signaling that Russian crude exports would continue flowing, crude prices plummeted.
Other factors contributing to the steep decline include heightened trade tensions between the US and several countries. The additional tariffs imposed on imports from the European Union and Mexico have exacerbated global economic uncertainty and dampened energy demand. China's June export data bucked expectations with a 5.8% year-over-year increase, but its recent trade deal with the US may be impacted by President Trump's announcement, potentially affecting crude prices.
Moreover, news of OPEC+ discussing a pause in further production increases has also weighed on crude prices. In contrast to October's planned hike of 548,000 barrels per day (bpd), OPEC+ might decide to maintain current production levels or even reduce output. This decision would address concerns about a potential oil glut due to rising inventories and slowing demand growth.
OPEC+ had agreed in July to increase crude production by 411,000 bpd from August 1, a move that marked the beginning of its efforts to reverse the 2-year-long production cut. However, Saudi Arabia's announcement of additional increases in output aimed at penalizing overproducing OPEC+ members and reducing oil prices has been viewed as a strategic approach.
Despite these factors, some market observers still see crude prices being supported by regional geopolitical tensions. The attacks on merchant ships in the Red Sea have increased concerns about shipping costs and supplies from the Middle East, potentially driving up freight rates and insurance costs for shippers.
The drop in crude oil held worldwide on tankers is also viewed as bullish for oil prices. Vortexa's report revealed that stationary tanker storage decreased by 4.6% in the week ending July 11 to approximately 78.03 million barrels.
Recent data from the US Energy Information Administration (EIA) has provided mixed signals about crude oil inventories and production levels. While crude stocks as of July 4 were -8.0% below their 5-year summer average, gasoline inventories fell by just -1.2%, and distillate inventories dropped by a significant -23.6%. US crude production also decreased modestly to 13.385 million bpd.
Notably, the EIA report on July 4 showed that US active oil rigs had fallen by -1 rig to a new 3.75-year low of 424 rigs in the week ending July 11. This decline marks a continuation of the downward trend seen over the past 2.5 years, which has erased much of the gains made since December 2020.
Despite these indicators, some analysts believe that energy prices may stabilize or recover as economies navigate ongoing trade tensions and demand uncertainties.