Oil trades higher as optimistic demand outlook offsets concerns over OPEC+ gathering

Business a.m.

Oil prices climbed higher on Wednesday, extending recent gains as expectations of OPEC+ maintaining production cuts collide with the travel-heavy summer season in the United States. Brent oil futures rose 0.4 percent to $84.22 a barrel, while West Texas Intermediate (WTI) crude futures jumped 0.4% to $80.17 a barrel.

Oil markets were buoyed by optimistic projections of the US summer season, a period during which fuel consumption typically peaks in the world’s largest consumer. This sentiment was underpinned by analyst forecasts that indicate a 2-million-barrel draw in overall inventories, further supporting the upward trajectory of prices.

Though oil markets saw a steady rally driven by the anticipated surge in U.S. summer fuel consumption, gains were tempered by a strong dollar, due to repeated warnings from the Federal Reserve of high-interest rates persisting in light of stubborn inflation. The focus this week centers on the Federal Reserve’s preferred inflation gauge, the PCE price index, alongside speeches from Fed officials and the revised GDP reading for the first quarter.

Analysts also noted that oil prices received a boost as traders bet that OPEC+ will keep ongoing production cuts in place during a meeting over the weekend, aiming to ease the glut of oil in the market that resulted from falling demand. The group is currently cutting output by 5.86 million barrels per day (bpd), representing roughly 5.7 percent of global demand, in an effort to restore balance to the oil market.

Oil markets are seeing a reduction of 3.66 million bpd by OPEC+ members, a measure expected to persist until the end of 2024. Supplementing this is an additional 2.2 million bpd of voluntary cuts primarily initiated by Saudi Arabia, slated to last until the end of June. 

OPEC+ has decided to maintain the current production cuts in light of the ongoing lower demand in the oil market, which has left many analysts predicting that the group will not increase output. In a note dated May 28, RBC Capital Markets analysts suggested that the decision to forgo an in-person meeting points to a “nothing to see here” decision, signaling no change in production until year-end.