Oil Prices Surge on Weaker Dollar and Strong Chinese Refinery Runs

Oil prices experienced a 3% gain, reaching a one-week high, driven by a weaker U.S. dollar and a surge in refinery runs in China. Brent futures settled at $75.67 per barrel, while U.S. West Texas Intermediate (WTI) crude settled at $70.62, marking their highest closes since June 8. The gasoline crack spread in the United States reached its highest level since July 2022, and U.S. diesel futures rose to their highest point since late April.

The oil market drew support from unexpected retail sales growth in the U.S. and higher-than-anticipated jobless claims, which weakened the dollar against other currencies. A weaker dollar makes crude oil cheaper for holders of other currencies, potentially boosting oil demand. Additionally, data revealed that China's oil refinery throughput in May increased by 15.4% from the previous year, reaching its second-highest total on record. This positive demand outlook from China contributed to the upward momentum in oil prices.

The European Central Bank's decision to raise interest rates to a 22-year high and the Federal Reserve's signal of potential rate hikes later in the year also influenced oil prices. While higher interest rates may increase borrowing costs for consumers and potentially slow economic growth, voluntary production cuts by OPEC+ and Saudi Arabia's decision to reduce output are expected to support prices amidst strong demand. UBS forecasts a supply deficit of approximately 1.5 million barrels per day in June and over 2 million barrels per day in July.

In the midst of these developments, Goldman Sachs has lowered its forecast for oil prices by nearly 10%. The bank now projects Brent crude to cost $86 a barrel in December, down from the previous estimate of $95, while West Texas Intermediate (WTI) crude is expected to fetch $81 a barrel, down from $89. The revision is attributed to weak demand in China and a surplus of supply from sanctioned countries, including Russia. Despite Saudi Arabia's decision to reduce output and the commitment of other OPEC+ members to restrain supply, the increase in supply from sanctioned countries has softened the price forecasts.

However, despite the downward revision, the outlook for oil prices remains positive. Voluntary production cuts by OPEC+ countries implemented in May and Saudi Arabia's additional reduction of barrels in July are expected to create a market deficit. Once these deficits become visible in on-land oil inventories, oil prices are likely to trend higher. The changing dynamics of supply and demand, shifting patterns of oil consumption, and ongoing efforts to transition to cleaner energy sources will continue to shape the oil market's trajectory.

Furthermore, the potential resumption of Iraq's northern oil exports could impact the oil market. A Turkish energy delegation is scheduled to meet Iraqi oil officials in Baghdad on June 19 to discuss the resumption of these exports. The halt of Iraq's 450,000 barrels per day of northern exports through the Iraq-Turkey pipeline since March 25 due to an arbitration ruling has affected the oil market dynamics. Resuming these exports would introduce additional supply, potentially influencing prices.

In conclusion, while uncertainties remain, the recent increase in oil prices can be attributed to a combination of factors such as a weaker U.S. dollar, robust refinery runs in China, unexpected retail sales growth, and supply-side developments. Despite Goldman Sachs' downward revision, the overall outlook for oil prices remains positive due to voluntary production cuts, potential resumption of Iraqi exports, and evolving market dynamics. The oil market's journey towards a sustainable future, alongside the ongoing energy transition, will continue to shape the industry and its pricing trends.