Global oil prices steadied on Tuesday as market participants balanced the prospect of OPEC+ maintaining supply curbs with the anticipation of strong U.S. summer fuel demand against concerns about prolonged elevated U.S. interest rates. This stability followed a modest rise in prices on Monday, driven by expectations of increased fuel consumption at the onset of the U.S. summer driving season.
The July contract for Brent crude, the global benchmark, edged up by 12 cents to $83.22 a barrel by 1155 GMT. Concurrently, U.S. West Texas Intermediate (WTI) crude climbed to $78.79, marking a 1.4% increase from Friday's close, following uninterrupted trading through the U.S. Memorial Day holiday.
"Oil has been in a recovery mode lately, perhaps driven by expectations of strong fuel demand due to the start of the summer driving and vacation season," noted Charalampos Pissouros, an analyst at broker XM.
Despite the optimistic mood, worries about sustained high U.S. interest rates continue to loom large. Higher interest rates elevate borrowing costs, potentially dampening economic activity and curbing oil demand. "Despite the indisputably brighter mood seen in the last two days, interest rate concerns will most plausibly act as a brake on further attempts to send oil prices meaningfully higher in the immediate future," commented Tamas Varga of broker PVM.
Adding to the mixed outlook, UBS analyst Giovanni Staunovo pointed out that "real-time mobility data indicates oil demand growth is still broadly healthy." This was echoed by data from flight analytics firm OAG, which showed a 5% month-on-month increase in U.S. domestic flight seat numbers for May, reaching over 90 million - surpassing pre-pandemic levels.
The focus now shifts to the upcoming OPEC+ meeting on Sunday. Traders and analysts widely expect the group to maintain its current voluntary production cuts of 2.2 million barrels per day. "It is a fair assumption that no changes in production levels will be forthcoming," added PVM's Varga.
In addition to OPEC+ dynamics, geopolitical tensions are also influencing market sentiment. Brent crude held near $83 a barrel, while WTI approached $79, despite increased tensions in the Middle East following the death of an Egyptian soldier during a clash with Israeli troops at the Rafah crossing into Gaza. Egypt's military confirmed the incident, which has further strained the country's relationship with Israel.
"A confluence of factors suggest some upside sensitivity in oil - from fraught geopolitics to inventory drawdown to OPEC's assumed preference to maintain curbs," said Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank Ltd. However, he cautioned that "the Gaza situation is only a warning not to be aggressively short, but not quite the unbridled bullish trigger."
The recent geopolitical developments add to the complexity of the oil market but have not yet caused major disruptions to crude flows from the Middle East, which accounts for about a third of global output. Nonetheless, incidents like Houthi attacks in the Red Sea have led to the rerouting of some supplies, highlighting the region's persistent risk factors.
Investors are also closely watching U.S. fuel demand data following the Memorial Day holiday, which traditionally signals the start of the peak summer driving season. The American Automobile Association (AAA) reported that this year's Memorial Day travel could see a significant increase in road trips, potentially boosting fuel consumption and supporting higher oil prices.
