Oil prices are volatile as supply concerns outweigh declining demand

Oil prices dipped in early trading on Thursday, then rallied, with WTI price dropping below $77.0 per barrel early in the day, then rising above $79.0 per barrel. If oil prices retreat, they may encounter support near $76.5 per barrel, while resistance may be found near $83.8 per barrel.

Oil prices were volatile on Thursday, dipping early in the day, then rallying, as supply concerns outweighed poor demand outlook. US crude oil inventories released on Wednesday showed a surprisingly large draw in US crude stockpiles, raising supply concerns and boosting oil prices. The US Energy Information Administration reported that weekly crude stocks fell by 3.7M barrels for the week to July 19th, against expectations of a smaller drop by 2.6M barrels and following another sharp drop by 4.9M barrels the week before.

Concerns about decreasing oil demand in China, the world’s largest importer, are putting pressure on oil prices. Oil demand outlook in China has been decreasing after the release of disappointing Chinese economic data. China’s GDP for the second quarter of the year has fallen below expectations. China’s GDP rose by only 4.7% in Q2 of 2024, after rising by 5.3% year-on-year in the first quarter.

Oil prices are kept in check by high central banks’ interest rates. The US Federal Reserve kept interest rates unchanged at its policy meeting in June, within a target range of 5.25% to 5.50%, as expected. The US Fed is keeping interest rates at a 23-year high, restricting economic growth and limiting the oil demand outlook as a result. Increased rate cut expectations are propping up oil prices. Rate cut expectations in September are currently above 90%, boosting oil prices.

Oil prices are also supported by the seasonal oil demand outlook. Increased oil demand outlook in the summer months is propping up oil prices. 

Supply concerns provide support for oil prices on global geopolitical risks. The ongoing crisis in the Middle East threatens to disrupt oil distribution. Tensions around the Red Sea area raise concerns that hostilities may spread further in the Middle East, affecting oil supply and distribution. Hopes of a ceasefire deal in Gaza, however, are putting pressure on oil prices. Israeli Prime Minister Benjamin Netanyahu signaled on Tuesday that a cease-fire deal may be reached between Israel and Hamas, that would allow hostages to be freed. Such a deal might be considered a first step towards ending the conflict in Gaza, easing oil supply concerns. 

OPEC+ has decided to extend most of its voluntary production cuts into 2025 to boost oil prices. OPEC, however, announced that it would gradually phase out oil production cuts and laid out plans for restoring production levels within 2025. 

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Written by:
Myrsini Giannouli

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