Analysts urge caution as the oil market is set to remain volatile in the near term.

Oil prices experienced a turbulent start to the week, plunging to as low as US$75 on Monday (July 5), the lowest since December 2023, before bouncing back later in the day. Currently, Brent crude has risen 0.27 per cent to US$76.69 per barrel, while West Texas Intermediate (WTI) has climbed 0.37 per cent to US$73.47 per barrel.

Last week's price drop was driven by growing recession fears in the United States, prompting previously optimistic investors to offload their petroleum positions. However, potential supply disruptions in the Middle East are preventing prices from collapsing completely.

Stephen Innes, managing partner at SPI Asset Management, noted that despite numerous tensions, including Houthi attacks on oil supply chains, there has not been a significant disruption in oil production. "Given Saudi Arabia's substantial regional influence, this may be intentional. Thus, the oil market's volatility might persist, especially considering the US election risk. Looking ahead to November, any outcome seems unfavourable for oil. The primary factor remains Middle East political risk, without which oil prices could be US$3.00 lower," Innes told Bernama.

The US presidential election on November 5 could impact the future of the US oil and gas industries, potentially leading to policy and regulatory changes. Recent escalations in the Middle East, such as the killing of Hezbollah and Hamas leaders, have increased fears of a broader regional conflict. The death of Hamas leader Ismail Haniyeh and threats from Iran suggest potential for significant escalation, which could have broader geopolitical implications, including impacts on global oil markets.

In this context, Venezuelan President Nicolas Maduro's re-election with 51 per cent of the vote, despite earlier polls favouring rival Edmundo Gonzalez, adds another layer of complexity. Maduro's extended presidency could affect Venezuela's oil production and, consequently, the global oil supply, intertwining with the volatile dynamics in the Middle East.

While current sentiment is decidedly bearish due to demand concerns, geopolitical risks in the Middle East and supply concerns from Venezuela—exacerbated by Maduro's presidency—could influence market dynamics, said Rystad Energy senior analyst Svetlana Tretyakova.

Regarding whether OPEC+ will reassess production cuts as Brent crude prices falter, BMI head of oil and gas Joseph Gatdula stated that the organisation had communicated that market conditions would be considered when implementing the planned increase in output outlined in their June 2024 meeting. "Should crude prices remain weak, this raises the risk that production cuts may continue longer than planned," he told Bernama.

Gatdula expects the current weaknesses in the oil market to persist as many bullish factors have been minimised by weak demand conditions. "On the bullish side, we note that supply disruptions, such as output from key Gulf states or interruptions of tanker traffic in the Strait of Hormuz, are the main factors that could reverse the recent downtrends. Any escalation of the conflict in Israel raises the prospect of higher oil prices, but economic headwinds will counter these," he added.

BMI's near-term view is that oil prices are set to rebound from current levels, approaching US$80 per barrel, mainly due to the oversold nature of the latest downturn in crude prices and stronger evidence for rate cuts in the US. This could spur new investment and economic growth, supporting a stronger crude demand growth narrative.

The possibility of a supply surplus starting later this year is being considered if OPEC+ countries proceed with their plan to unwind some of their voluntary cuts, said Gatdula. There is a growing expectation of a supply surplus later this year and into 2025, with peak summer demand in key markets expected to be lower than previously anticipated. He highlighted that recent increases in fuel and crude stocks, or in some cases steady levels, contrast with expectations of drawdowns in stocks. "The resilient stocks of crude and fuels indicate that demand is failing to keep pace with supply, which could further add to inventories should OPEC+ continue with their proposed production increases," said Gatdula.

Source: Bernama