Oil prices rise as supply-demand balance expected to tighten in third quarter

Crude oil futures rose Wednesday as traders bet on tightening supplies later in the year. The Federal Reserve’s indication of just one interest rate cut this year and bearish U.S. stockpile data limited the gains.

The Department of Energy sees global demand rising this year by 1.1 million barrels per day, or bpd, up from a previous forecast of 900,000 bpd. The increased demand implies a supply deficit, with world production expected to rise 800,000 bpd in 2024.

Oil prices gained nearly 2% earlier in the day, but pulled back after the U.S. reported a 3.7 million barrel rise in crude oil inventories for last week, compared to analysts’ expectations of a one million barrel draw.

Gasoline stockpiles rose by 2.6 million barrels, compared to 891,000 expected by analysts. Fuel demand increased by 94,000 bpd to about nine million bpd total. Daily average fuel demand has been tepid, or 1.5% lower compared to the same period last year, despite the start of the summer driving season.

Oil pulled back further after the Federal Reserve indicated that only one interest rate cut is in store this year, as opposed to a forecast of three cuts as recently as March, citing “modest” progress in capping inflation.

Here are Wednesday’s closing energy prices:

  • West Texas Intermediate July contract: $78.50, up 60 cents, or 0.77%. Year to date, U.S. oil has gained 9.5%.
  • Brent August contract: $82.60 per barrel, up 68 cents, or 0.83%. Year to date, the global benchmark is ahead 7.2%.
  • RBOB Gasoline July contract: $2.39 per gallon, down 0.6%. Year to date, gasoline has advanced 13.8%.
  • Natural Gas July contract: $3.04 per thousand cubic feet, down 2.68%. Year to date, gas is up 21%.

“In the short term, the oil market is likely to tighten,” Martijn Rats, commodity strategist at Morgan Stanley, told clients in a note. The investment bank sees a 1.2 million bpd deficit in the third quarter, which could push Brent prices to $86 per barrel.

OPEC, meanwhile, stuck to its demand growth forecast of 2.2 million bpd due to solid global economic growth of 2.8% this year. Those forecasts clashed with a bearish outlook from the International Energy Agency, which sees weakening demand and rising supplies.

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WTI vs. Brent

Citi analysts described the recent price action as rangebound, with volatility near a decade low. The bank also expects a tight third quarter due to summer fuel demand, though it anticipates that the planned OPEC+ production increases will make for a “bear market” late in 2024 and into 2025 with Brent falling to $60 per barrel.

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