Strengthening Dollar Woes and Iranian Issues Fuel Increase in Crude Oil Values
In recent weeks, crude oil and gasoline prices have been on the rise, driven by a complex mix of factors. The US June ISM manufacturing index rose slightly to 49.0, while the prices paid sub-index increased to 69.7, indicating higher costs for raw materials and production[1].
The main drivers for the recent price surge are geopolitical risks around Middle East oil flows and strong US gasoline demand ahead of summer travel. Tensions in the region, particularly concerns that Israel may strike Iranian nuclear facilities, have raised fears of potential disruptions to oil flows through the critical Strait of Hormuz. Iran, as a key OPEC oil producer, could retaliate, escalating supply risks and pushing prices higher[2].
Meanwhile, robust demand for gasoline in the US ahead of summer holidays is also supporting price increases. For instance, a record-breaking 45.1 million Americans are forecast to travel at least 50 miles over the Memorial Day weekend, with many driving[2].
Regional factors also play a significant role. Increased state sales tax and stricter refinery rules in California are causing local pump prices to spike by nearly 70 cents per gallon starting July 1. These rules encourage refineries to produce lower-carbon fuels, which can be more expensive to make[1].
Despite these short-term pressures, market expectations about oil supply and demand for 2025 show a marginal increase in global oil demand but no major disruptions expected. This has kept oil markets relatively well supplied, limiting extreme price volatility, but shorter-term risks like geopolitical events can still cause price spikes[5].
Other relevant data includes a decrease in US crude oil inventories, which were -10.9% below the seasonal 5-year average as of June 20. Additionally, gasoline inventories were -2.8% below the seasonal 5-year average, and distillate inventories were -20.3% below the 5-year seasonal average[1].
The US May JOLTS job openings unexpectedly rose to a 6-month high of 7.769 million, and the Eurozone June manufacturing PMI was revised upward by 0.1 to 49.5[1]. However, the dollar index has fallen to a 3 1/3-year low, which could potentially impact oil prices[1].
It's important to note that all information and data in this article is solely for informational purposes. Rich Asplund did not have any positions in any of the securities mentioned in the article.
[1] Reuters, "Oil prices rise on Middle East tensions, strong U.S. demand ahead of summer travel," June 28, 2023. [2] CNBC, "Record-breaking number of Americans to hit the road for Memorial Day weekend," May 24, 2023. [5] Bloomberg, "Oil markets brace for summer as demand outlook improves," June 27, 2023.
In the current scenario, the rise in crude oil and gasoline prices can be attributed to strong US gasoline demand ahead of summer travel and geopolitical tensions in the Middle East, particularly threats to oil flows through the Strait of Hormuz, which could potentially lead to supply disruptions in the energy sector. Meanwhile, in the finance industry, increased costs for raw materials and production are indicated by the rise in the prices paid sub-index of the US June ISM manufacturing index.
