Oil gains strength from seasonal fuel demand; tighter market conceals US debt ceiling risk

Oil prices rose on May 23 as seasonal rise in fuel demand and supply cuts from OPEC+ producers overshadowed investor concerns over US debt ceiling risks, amid a tighter market outlook. The gains supported to Monday's rally when crude gained strength from 2.8 per cent increase in US gasoline futures.  

The onset of voluntary production cuts by several members of the Organization of the Petroleum Exporting Countries and allies including Russia, known as OPEC+, is also expected to tighten supply, leading to a tighter market outlook. 

Brent crude was up 57 cents, or 0.8 per cent, to $76.56 a barrel while US West Texas Intermediate (WTI) crude gained 42 cents, or 0.6 per cent, to $72.47. The dollar came off a two-month top against a basket of major peers as investors expect the Federal Reserve to keep rates unchanged at its June meeting. A softer greenback makes dollar-denominated commodities more attractive to investors.

Also Read: Oil trades steady as US debt ceiling risk drags on demand optimism; where are prices headed?
 

Saudi gives warning over further output cuts

Saudi Arabia’s top energy official issued another warning to oil short-sellers, just over a week before the OPEC alliance will meet for further decisions on the oil output supply.

“I keep advising them that they will be ouching — they did ouch in April,” Saudi Energy Minister Prince Abdulaziz bin Salman said at the Qatar Economic Forum in Doha on Tuesday. “I don’t have to show them my cards and I’m not a poker player. But I’d tell them: ‘Watch out’.”

"With the Saudi energy minister once again telling speculators to 'watch out' some (short sellers) may have second thoughts," Ole Hansen, head of commodity strategy at Saxo Bank told news agency Reuters.

The International Energy Agency (IEA) last week said that the decline in oil prices over the past few weeks contrasts with an expected tightening of the market later this year when demand is set to exceed supply by nearly 2 million barrels per day (bpd).
 

Also Read: OPEC's losing race against inflation: The price of a barrel of oil at an all-time low
 

US debt ceiling; traders bearish on crude oil futures

On the debt ceiling, White House and congressional Republican negotiators will meet again to resolve an impasse over raising the $31.4 trillion debt ceiling, with the nation facing the risk of default in as little as nine days.

"Oil prices are consolidating their bottoms, helped by a seasonal increase in US gasoline demand from next week," according to Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.

Across the most important petroleum futures and options contracts, hedge funds’ positions indicated the most bearish sentiment toward petroleum since 2011, according to Bloomberg’s estimates.

Despite tight market conditions, hedge fund managers and traders continue to be bearish on crude and continue to dump bullish bets. Selling in crude oil futures and options began in the middle of April, after the OPEC+-fueled rally in prices. 

Where is oil headed? 

Oil prices will return to above $80 per barrel in the second half of this year and could continue rising toward $90 due to a deepening supply deficit, according to Bank of America.

Analysts in the latest monthly Reuters survey also see prices rising toward $90 per barrel by the end of this year, driven by Chinese demand and a tightening market following OPEC+'s latest production cuts.