Oil prices surge amid Middle East tensions and record US demand
Geopolitical risks drive market uncertainty
Oil prices are surging as tensions in the Middle East escalate and US oil demand reaches new heights. The recent assassination of Hamas's political leader Ismail Haniyeh in Iran by Israeli forces has sparked fears of a widening conflict in the region. This event, coupled with the assassination of a senior Hezbollah official in Lebanon, has created a volatile environment for global oil markets.
Oil price chart
Iran's retaliation threat fuels price surge
The assassination of Haniyeh on Iranian soil has led to immediate threats of retaliation from Tehran. This development has given a substantial boost to oil prices, with analysts suggesting that any significant action by Iran could potentially push Brent crude oil into three-digit territory. As of Thursday morning, Brent crude had surpassed $81.00 per barrel, while West WTI was trading around $78.50.
International community calls for diplomatic resolution
The United Nations Security Council has responded to the escalating situation by urging member states to intensify diplomatic efforts to resolve the conflict. Representatives from various nations, including Japan and China, have expressed deep concern over the potential for widespread conflict in the region. The Iranian representative to the UN has labelled the assassination of Haniyeh as an act of terrorism, further heightening tensions.
Record US oil demand adds to bullish sentiment
Contributing to the bullish oil market outlook, the US Energy Information Administration (EIA) has reported that oil demand in the United States reached a seasonal record in May, at 20.80 million barrels daily. This figure represents a significant upward revision from previous EIA estimates and underscores the strength of US energy consumption.
Global oil inventories reach record deficit
Adding to the fundamental reasons for oil’s surge, global oil inventories are reportedly on a downward trajectory. According to Eric Nuttall, senior portfolio manager at Ninepoint Partners, inventories have reached a record deficit relative to their average levels. Nuttall also noted improvements in OPEC+ production cut compliance as a factor contributing to a bullish view on oil.
Market outlook: Upward pressure likely to persist
Unless diplomatic efforts succeed in de-escalating tensions in the Middle East, oil prices are expected to continue their upward trajectory. This outlook is based on a combination of strong fundamental factors, including high demand and declining inventories, as well as the growing geopolitical risk premium. As the situation remains fluid, market participants will be closely monitoring developments in the Middle East and their potential impact on global oil supplies and prices.
How are IG clients positioned?
Recent oil price weakness has seen a surge in IG clients buying into the commodity. As the chart of US light crude positioning below shows, IG clients have boosted their net long positions from 55% at the July peak to over 80% this week when the price reached a near two-month low.