Crude oil prices have surged higher as we enter August, following an impressive performance in July. The impact of OPEC+ production cuts seems to be taking effect, as economic growth shows signs of picking up. The recent performance in the WTI futures market also suggests a positive outlook for oil prices.
Last month, the WTI futures contract recorded a remarkable 15.80% increase, while the Brent contract gained 14.15%. Several factors have contributed to this surge in oil prices. Firstly, the Federal Reserve appears to be less aggressively hawkish in its monetary policy, reducing concerns about tightening measures.
As a result, the interest rate market has assigned a low probability to a tightening at the Federal Open Market Committee meetings for the remainder of the year, and the market expects over 100 basis points of cuts by the Fed by the end of 2024.
Furthermore, OPEC+ member countries’ commitment to production cuts has boosted market confidence. Saudi Arabia extended its production cut of 1 million barrels per day into August, and Russia also announced a reduction of 500,000 barrels per day.
This tightening of supply coincides with a more optimistic outlook for avoiding a prolonged economic downturn, supported by positive earnings results for the second quarter and forward-looking guidance that has boosted investor confidence, leading major equity indices to gain ground.
The RBOB crack spread, which gauges gasoline prices relative to crude oil prices and reflects refiners’ profit margin, has been trending upward recently. This may further support oil prices by potentially increasing demand for crude products.
Another positive indicator is the backwardation observed in the front month WTI futures contract. This means that the current contract’s price is higher than that of the contract maturing just after it, suggesting an expanding need for buyers to take immediate delivery rather than waiting for a longer period. This also hints at growing demand for oil.
As we move forward, market watchers will closely monitor the American Petroleum Institute (API) inventory report and the US Energy Information Agency (EIA) weekly petroleum status reports for insights into shifting demand and supply trends. Overall, the combination of OPEC+ production cuts, a less hawkish Fed, and positive economic indicators seems to be driving crude oil prices higher as we start the month of August.
