West Texas Intermediate (WTI) crude oil is trading above $74 per barrel in the early hours of Thursday’s Asian session, after hitting a three-week high on Wednesday. The oil price is supported by strong demand expectations and geopolitical tensions, but faces some headwinds from rising US inventories and a firmer US dollar.
Demand Outlook and Geopolitical Risks Boost Oil Price
One of the main drivers of the oil price rally is the optimistic outlook for global oil demand, as the world economy recovers from the pandemic-induced slump. The International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) both raised their demand forecasts for 2021 and 2022 in their latest monthly reports, citing the easing of lockdown measures and the progress of vaccination campaigns. According to the IEA, global oil demand is expected to grow by 5.4 million barrels per day (bpd) in 2021 and by 3.1 million bpd in 2022, reaching pre-pandemic levels by the end of next year. Similarly, OPEC projects that world oil demand will increase by 6 million bpd in 2021 and by 3.3 million bpd in 2022, surpassing 100 million bpd in the second half of 2022.
Another factor that has lifted the oil price is the heightened geopolitical risk in the Middle East, where Iran and Saudi Arabia are locked in a proxy war in Yemen. The conflict has escalated in recent weeks, with Iran-backed Houthi rebels launching drone and missile attacks on Saudi oil facilities and military targets. The attacks have raised concerns about the stability of oil supply from the region, which accounts for about 20% of global production. Saudi Arabia, the world’s largest oil exporter, has vowed to defend its territory and interests against any threats. Meanwhile, Iran, which has been under US sanctions that limit its oil exports, has been engaged in indirect talks with the US to revive the 2015 nuclear deal that could ease the tensions and pave the way for more Iranian oil to enter the market.
Rising US Inventories and Stronger US Dollar Weigh on Oil Price
However, the oil price rally has also faced some resistance from the supply side, as US crude oil inventories unexpectedly rose by 2.3 million barrels last week, according to data from the Energy Information Administration (EIA). The increase was driven by lower refinery runs and higher imports, which offset a decline in domestic production. The rise in US stockpiles suggests that the supply-demand balance in the world’s largest oil consumer is still fragile.
Another factor that has put some pressure on the oil price is the strength of the US dollar, which makes oil more expensive for buyers using other currencies. The greenback has gained ground against its major peers in recent days, as investors have priced in a more hawkish stance from the Federal Reserve. The Fed signaled last week that it could start tapering its bond-buying program later this year and raise interest rates sooner than expected, amid rising inflation and robust economic growth. A stronger US dollar tends to weigh on commodity prices, as it reduces their appeal as a hedge against inflation and currency devaluation.
Oil Price Outlook: Bullish or Bearish?
Looking ahead, the oil price outlook remains uncertain, as there are both bullish and bearish factors at play. On the one hand, the demand recovery and the geopolitical tensions could continue to support the oil price, especially if OPEC and its allies maintain their disciplined output policy. OPEC+, which consists of OPEC members and other major producers such as Russia, agreed in July to gradually increase their production by 400,000 bpd each month until December 2022, restoring about 5.8 million bpd of output that was cut during the pandemic. However, some analysts warn that OPEC+ may have to revise its plan if demand growth slows down or if supply disruptions persist.
On the other hand, the rising US inventories and the stronger US dollar could limit the upside potential for the oil price, especially if the pandemic situation worsens or if the Fed tightens its monetary policy further. The emergence of new variants of Covid-19 poses a risk to the global economic recovery and oil demand growth, as some countries may have to reimpose lockdowns or travel restrictions to contain the virus spread. Moreover, a faster-than-expected tapering or rate hike by the Fed could trigger a sell-off in riskier assets such as commodities and emerging market currencies.
