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Oil prices fell on Monday as investors considered the reduction of Middle East threats and the potential rise in oil production by OPEC+ in August. However, despite this temporary dip, oil prices have started to recover again this month. Analysts have noted that the oil supply risk premium is falling as geopolitical tensions ease.
Last week, both Brent and U.S. crude oil benchmarks experienced their biggest drop since March 2023. However, they managed to end the month with gains, rising by 6% and 7% respectively. Brent futures closed at $67.61 on Monday, down 16 cents or 0.2%. The more active September contract closed at $66.74. West Texas Intermediate crude fell by 41 cents or 0.6% to $65.11.
The recent increase in oil prices was triggered by Israel’s attack on Iran’s nuclear facilities on June 13, pushing prices above $80 a barrel. However, following a ceasefire and signs of supply stabilization, prices have since fallen back to the $67 mark. “The ceasefire that was quickly engineered appears to be holding up, so the supply risk premium is continuing to be withdrawn rapidly,” said John Kilduff, partner at Again Capital.
According to the Energy Information Administration’s Petroleum Supply Monthly series, U.S. crude oil output reached a record 13.47 million barrels per day in April, up from 13.45 million in March. This increase in production has helped offset some of the supply concerns in the market.
Last week, four sources from OPEC+ revealed plans to increase output by 411,000 barrels per day in August. This comes after production rises in May, June, and July. OPEC+ has already supplied 1.78 million barrels per day this year, which accounts for 1.5% of global demand. However, analysts are wary of the potential oversupply in the market, which could put downward pressure on prices.
“I believe this potential supply pressure remains under-priced, leaving crude vulnerable to further weakness,” said Ole Hansen, commodity strategist at Saxo Bank. The upcoming OPEC+ meeting on July 6 will provide more clarity on production plans and market dynamics.
Despite the planned output increase by OPEC+, market pressure continues to persist due to concerns over excess supply. Reuters reported that OPEC oil output grew in May, but some nations that had exceeded their production limits are now curbing their output. Saudi Arabia and the UAE have increased production less than initially authorized.
Additionally, Kazakhstan, which has consistently exceeded its OPEC+ quotas, is expected to boost output at its largest Caspian oilfields and increase oil production by 2% this year. These developments highlight the challenges faced by OPEC+ in managing production levels and ensuring market stability.
Looking ahead, experts predict that Brent crude will average $67.86 a barrel in 2025, up from the previous estimate of $66.98. Similarly, U.S. crude is expected to average $64.51, an increase from the earlier forecast of $63.35. These projections suggest a gradual recovery in oil prices over the coming years, supported by improving market conditions and supply-demand dynamics.
