Crude Oil Surges on Global Supply Crunch and Strong US Economy

Oil Prices Rally on Concerns about Tighter Global Supplies and Strong US Economic Data

The global oil market has been experiencing a surge in prices due to concerns about tighter supplies, particularly after Iraq announced that it had lost approximately 200,000 barrels per day (bpd) of crude production due to drone attacks on several oil fields in the Kurdistan region. This development comes as a significant blow to the global oil supply chain, which has been already under pressure from various factors.

Meanwhile, the US economy is showing signs of strength, with better-than-expected economic reports providing a boost to energy demand and crude prices. The August WTI crude oil (CLQ25) price rallied by +1.16 (+1.75%) on Thursday, while the August RBOB gasoline (RBQ25) price closed up +0.0264 (+1.23%). The gains in crude prices were limited due to the rally in the dollar index (DXY00), which reached a 3.5-week high.

Strength in US Economy Positive for Energy Demand and Crude Prices

The strength of the US economy is having a positive impact on energy demand, driving up crude prices. The latest economic reports are indicating that the labor market is stronger than expected, with weekly initial unemployment claims falling by -7,000 to a 3-month low of 221,000. This is in contrast to expectations of an increase to 233,000.

In addition to the strong labor market, June retail sales rose +0.6% month-over-month (m/m), surpassing expectations of +0.1% m/m. The July Philadelphia Fed business outlook survey also increased by +19.9 to a 5-month high of 15.9, outpacing expectations of -1.0.

These positive economic indicators are translating into higher energy demand and crude prices, with the August WTI crude oil (CLQ25) price rising by +1.16 (+1.75%) on Thursday.

Iraq to Boost Crude Exports through Iraq-Turkey Pipeline

However, the outlook for Iraq’s crude exports is a significant limiting factor in the rally of crude prices. The Iraqi government has approved a plan to resume oil exports from the semi-autonomous Kurdish region through the Iraq-Turkey pipeline, which has been halted since March 2023. Kurdistan expects to supply Iraq’s crude market with 230,000 bpd of crude once exports resume.

Iraq is OPEC’s second-largest oil producer, and this development could potentially increase global oil supplies and weigh on prices. However, it remains to be seen how quickly the Kurdish region can ramp up production and meet its export targets.

Concerns about Global Oil Glut Negative for Crude Prices

A concern that is negative for crude prices is the possibility of a global oil glut. On July 5, OPEC+ agreed to raise its crude production by 548,000 barrels per day (bpd) beginning August 1, exceeding expectations of a 411,000 bpd increase.

Saudi Arabia also stated that additional similar-sized increases in crude output could follow, which is viewed as a strategy to reduce oil prices and penalize overproducing OPEC+ members. OPEC+ is boosting output to reverse the 2-year-long production cut, gradually restoring a total of 2.2 million bpd of production by September 2026.

Pause in Further Production Increases Discussed by OPEC+

In a supportive factor for oil prices, Bloomberg reported last Thursday that OPEC+ is discussing a pause in further production increases from October, following its next monthly hike in September of 548,000 barrels. This development suggests that OPEC+ may be concerned about a slowdown in global oil demand in the second half of this year that could lead to a supply glut if the group keeps boosting production.

Global Crude Oil Inventories and Supply

The International Energy Agency (IEA) has been warning about the accumulation of inventories at a rate of 1 million bpd, which could lead to a surplus by Q4-2025 equivalent to 1.5% of global crude consumption. This development is negative for crude prices, as it suggests that the market may be heading towards a supply glut.

Crude Oil Stored on Tankers Falls

A decrease in crude oil held worldwide on tankers is bullish for oil prices. Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least seven days fell by -4.6% week-over-week (w/w) to 78.03 million bbl in the week ended July 11.

EIA Report Indicates Decline in US Crude Inventories

Wednesday’s weekly EIA report showed that US crude inventories in the week ended July 11 fell by -3.859 million barrels, marking the first draw in three weeks. Gasoline inventories rose +3.399 million bbls, and distillate inventories increased by +4.173 million bbls.

US Crude Oil Production Falls Modestly

The EIA report also showed that US crude oil production in the week ending July 11 fell -0.1% w/w to 13.375 million barrels per day (bpd), which is modestly below the record high of 13.631 million bpd posted in the week of December 6, 2024.

Baker Hughes Reports Decline in Active US Oil Rigs

Baker Hughes reported last Friday that the number of active US oil rigs decreased by -1 rig to a new 3.75-year low of 424 rigs. Over the past 2.5 years, the number of US oil rigs has fallen sharply from the 5.25-year high of 627 rigs reported in December 2022.

Conclusion

The global oil market is experiencing a complex set of dynamics that are driving up crude prices. Concerns about tighter supplies, particularly after Iraq’s loss of 200,000 bpd of production due to drone attacks, are contributing to the rally in crude prices. However, the outlook for Iraq’s crude exports is a significant limiting factor, and concerns about a global oil glut remain negative for crude prices.

The strength of the US economy is providing a boost to energy demand and crude prices, with better-than-expected economic reports indicating a stronger labor market and higher retail sales. The EIA report indicates a decline in US crude inventories, which could lead to higher prices.

However, OPEC+ is boosting output to reverse the 2-year-long production cut, gradually restoring a total of 2.2 million bpd of production by September 2026. A pause in further production increases from October is being discussed by OPEC+, which could provide support for oil prices.

The global crude oil market is complex and subject to various factors that can impact prices. However, it appears that the current set of dynamics is driving up crude prices, with concerns about tighter supplies and a strong US economy contributing to the rally.