Crude Oil Prices Rise Despite Economic Headwinds and Market Volatility

On Friday, June WTI crude oil (CLM25) closed up by +0.87 (+1.41%), while June RBOB gasoline (RBM25) rose by +0.0074 (+0.25%). The uptick in crude and gasoline prices followed remarks from Iran’s foreign minister, who raised concerns about the ongoing nuclear discussions with the United States. However, gains were tempered by a stronger dollar and a surprising drop in the University of Michigan’s May consumer sentiment index, which slid to its lowest point in three years.

Nuclear Deal Uncertainty Impacts Market

Crude oil prices saw an increase on Friday, fueled by comments from Iranian Foreign Minister Abbas Araghchi. He indicated that there are “many opposing and contradictory positions” from U.S. negotiators, and noted that Iran has yet to receive any formal proposal regarding the nuclear talks. This uncertainty dampened hopes for a swift agreement between the U.S. and Iran.

Weaker Economic Indicators Affect Demand

Global economic news for Friday painted a less-than-optimistic picture, affecting energy demand and crude prices. April housing starts in the U.S. increased by +1.6% month-on-month to 1.361 million, falling short of the expected 1.364 million. Similarly, building permits dropped by -4.7% month-on-month to 1.412 million, below the consensus estimate of 1.450 million. Additionally, the University of Michigan’s May consumer sentiment index decreased by -1.4 to a three-year low of 50.8, contrary to expectations for an uptick to 53.4. Japan’s Q1 GDP also contracted by -0.7% quarter-on-quarter annualized, which was worse than the anticipated -0.3%.

Market Reactions to Geopolitical Factors

Crude prices fell sharply on Thursday after President Trump commented that the U.S. and Iran are “getting closer to a deal” regarding Iran’s nuclear program. According to Bloomberg estimates, if sanctions on Iranian crude are lifted, global markets could see an influx of 300,000-400,000 barrels per day (bpd).

Concerns about energy demand compounded on Thursday when the International Energy Agency (IEA) predicted a reduction in global oil demand to 650,000 bpd for the remainder of the year, down from 990,000 bpd in Q1, citing “economic headwinds.”

Global Supply Dynamics Create Price Support

On Tuesday, support for crude prices was bolstered by news of sanctions imposed by the U.S. State Department on an international network that facilitated shipments of Iranian oil to China. The sanctions targeted Sepehr Energy Jahan Nama Pars for allegedly using crude sales revenue to fund weapons development, including ballistic missiles and drones.

Support for crude prices also emerged from a recent agreement between the U.S. and China to temporarily reduce tariffs on each other’s goods for three months. The U.S. will lower its tariffs on China from 145% to 30%, while China will cut its duties from 125% to 10%.

Looking ahead, there is optimism surrounding U.S. gasoline demand. The American Automobile Association projects that 39.4 million Americans are expected to travel by car this Memorial Day weekend, up +3.1% from last year, fueled by gasoline prices that are 50 cents a gallon cheaper than in 2022.

Production Increases and Supply Concerns

Last Monday, crude prices dropped to a five-week low, reflecting concerns about a global oil glut after OPEC+ agreed on May 3 to increase crude production by 411,000 bpd in June. Saudi Arabia indicated that additional production increases may follow, aimed at reducing oil prices and addressing overproduction by OPEC+ members, like Kazakhstan and Iraq.

OPEC+ is gradually restoring a total of 2.2 million bpd of production, reversing a two-year-long cutback. While OPEC had initially planned to restore production between January and late 2025, it is now expected that cuts won’t be fully lifted until September 2026. In April, OPEC crude production decreased by -200,000 bpd to 27.24 million bpd.

Inventory Data and Market Sentiment

An increase in crude oil stored worldwide on tankers is a bearish signal for oil prices. Vortexa reported an 11% rise week-on-week, bringing the total to 93.32 million barrels as of May 2.

In contrast, the U.S. implemented new sanctions on Russia’s oil industry on January 10, designed to limit global oil supplies. The sanctions targeted Gazprom Neft and Surgutneftgas, which were responsible for exporting approximately 970,000 bpd of Russian crude in the first ten months of 2024. Russian crude exports rose to a five-month high in March, reaching 3.45 million bpd.

According to Wednesday’s EIA report, U.S. crude inventories as of May 9 were -6.5% below the seasonal five-year average. Gasoline and distillate inventories were also lower, at -2.8% and -16.1% below their respective averages. Additionally, U.S. crude oil production saw a slight rise of +0.1% week-on-week, reaching 13.387 million bpd, though still below the December high of 13.631 million bpd.

Lastly, Baker Hughes reported a decline in active U.S. oil rigs, which fell by one to 473 rigs, just above the recent low of 472 recorded on January 24. Overall, the number of active U.S. oil rigs has decreased significantly from the five-year high of 627 rigs posted in December 2022.

On the date of publication, Rich Asplund did not hold positions in any securities mentioned in this article. All information and data contained herein are for informational purposes only.