Crude oil prices have surged over the past three weeks, with Brent climbing from this month’s low of $70 to $100 on Thursday. West Texas Intermediate (WTI) has jumped from $67.20 to $93.50 over the same period.
Despite this over 30% rally from the monthly low, strategists have been surprised that oil prices are not even higher, given the ongoing US-Iran and Russia-Ukraine conflicts.
Conditions for Higher Crude Oil Prices Exist
Fundamentally, oil prices should be much higher than where they are today. The US-Iran war has escalated with no end in sight. Media reports suggest that President Donald Trump is considering escalating the attacks against Iran.
According to the NYT, Iranian leaders rejected a ceasefire proposal delivered by Iraq’s prime minister. Iran believes it can withstand US attacks, particularly with Trump facing midterm elections amid a decline in his approval ratings, including among MAGA supporters.
A prolonged war will lead to oil supply issues as traffic through the Strait of Hormuz dwindles. At the same time, the Houthis are escalating their attacks against Saudi Arabia, having fired on two ships attempting to cross the Bab el-Mandeb Strait, through which millions of barrels pass daily.
Meanwhile, the Russian-Ukrainian war has escalated, with Ukraine hitting many Russian refineries and tankers. As a result, Russia has been forced to ration fuel in some of its provinces.
Recent data also shows that crude oil inventories have dropped significantly in the past few months. US Strategic Petroleum Reserves have dwindled to the lowest level since 1980s.
Why Prices are Not Higher
Despite all these developments, oil prices remain in a bear market after falling by over 20% from the highest levels this year.
There are a few reasons behind this price action. One of them is that the US has boosted its oil production, with companies taking advantage of the higher prices. It is now producing 13.8 million barrels of oil per day.
The US and other countries have also released millions of barrels from their strategic reserves. In the US, the government has released over 104 million barrels from these reserves. It has been authorized to release 172 million barrels. Globally, countries pledged to release over 400 million barrels.
Further, China, the biggest oil importer in the world, has slowed its imports in the past few months. The country imported about 6.4 million barrels of oil per day in June, the lowest level since October 2016 and a 41% year-on-year decrease.
Additionally, traders are likely pricing in a deal between the US and Iran happening in the coming weeks or months. For example, Gulf countries will likely pressure Trump to ink a deal as their exports drop. Such a move will lead to lower prices as we experienced when the two sides signed the memorandum of understanding.
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