Oil Prices Decline Amid Supply Concerns and Dollar Strength

WTI crude oil for July (CLN25) closed down -0.37 (-0.60%) on Thursday, while July RBOB gasoline (RBN25) also dropped -0.0127 (-0.60%). Both crude oil and gasoline prices hit one-week lows, influenced by a stronger U.S. dollar which typically exerts downward pressure on energy prices. Moreover, expectations of a global supply glut weighed on the market, following a Bloomberg report that OPEC+ is considering an increase of 411,000 barrels per day (bpd) in crude output ahead of its meeting on June 1.

OPEC+ Production Increases Impacting Prices

Concerns regarding an oversupply of oil persist as OPEC+ contemplates a production boost of 411,000 bpd for July. This follows a similar agreement made on May 3, when OPEC+ decided to elevate crude output by the same amount for June. Saudi Arabia is poised to implement additional production increases as a measure to lower oil prices and address overproduction issues from certain OPEC+ members, specifically Kazakhstan and Iraq. The group is working to reverse a two-year production cut and aims to gradually restore 2.2 million bpd of output. Although initial plans targeted a full restoration by late 2025, that timeline has now extended to September 2026, with OPEC’s April production dipping by -200,000 bpd to 27.24 million bpd.

Positive Economic Data Supporting Demand

In contrast to supply concerns, better-than-expected global economic indicators on Thursday provided some support for energy demand. The U.S. May S&P manufacturing PMI unexpectedly rose by 1.9 to 52.3, surpassing expectations of a decline to 49.9. Additionally, U.S. weekly initial unemployment claims fell by 2,000 to a one-month low of 227,000, defying predictions of an increase. In the Eurozone, the May S&P manufacturing PMI increased by 0.4 to a 2¾-year high of 49.4, while Germany’s May IFO business climate index climbed to an 11-month high of 87.5, up from expectations of 87.3.

Geopolitical Tensions Support Prices

Geopolitical risks in the Middle East may offer some support to crude prices. Recent U.S. intelligence suggests that Israel is preparing for a potential strike on Iranian nuclear facilities, adding an element of uncertainty to the market. Additionally, doubts surrounding the viability of a nuclear deal between Iran and the U.S. have surfaced. Iranian Supreme Leader Ali Khamenei expressed skepticism about negotiations, urging the U.S. administration to cease what he termed “talking nonsense.” In response, President Trump warned Iran of dire consequences should they fail to swiftly accept a U.S. proposal regarding their nuclear program.

Sanctions on Iranian Oil Impact Supply

Crude oil prices also find support from the U.S. State Department’s recent sanctions targeting an international network involved in shipping Iranian oil to China. The sanctions, which focus on Sepehr Energy Jahan Nama Pars, allege that revenue from these oil sales funds weapons development and terrorism activities.

Gasoline Demand Forecast Positive for Prices

Furthermore, projections for improved U.S. gasoline demand are encouraging. The American Automobile Association forecasts that 39.4 million Americans will travel by car this Memorial Day weekend, marking a 3.1% increase from last year, driven by gasoline prices that are 50 cents per gallon lower than the previous year.

Crude Inventory and Production Updates

Despite some supportive signals, an increase in global crude oil stored on tankers represents bearish sentiment. Vortexa reported that crude oil held on tankers for at least seven days rose by 3.1% week-over-week, totaling 90.97 million barrels as of the week ending May 16.

Further, new U.S. sanctions on Russia’s oil industry from earlier this year may impact global supply dynamics. Russian oil product exports reached a five-month high of 3.45 million bpd in March; however, recent data indicates that Russian crude exports have dropped by 90,000 bpd week-over-week to 3.4 million bpd as of May 18.

Baker Hughes Rig Count Signals Caution

According to Baker Hughes, the active U.S. oil rig count fell by one to 473 rigs in the week ending May 16, approaching a three-and-a-quarter-year low of 472 rigs observed on January 24. The total oil rig count has declined from a five-year high of 627 rigs recorded in December 2022.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.