Will there be a big rise in oil prices? WTI crude futures rose to around $66.1 per barrel on Tuesday, continuing gains for the second consecutive session, as ongoing geopolitical tensions fuel concerns about a possible reduction in global supply.
Russia and Ukraine held a second round of direct peace talks after the sharp escalation of hostilities the previous day, but the discussions failed to produce any significant progress in resolving the three-year conflict.
Further intensifying supply concerns, a wildfire in Alberta, Canada, forced a temporary halt to oil and gas production. Meanwhile, OPEC+ kept its July production increase at the same level as the previous two months, easing fears of a supply surge.
In addition, an Iranian diplomat said on Monday that Iran is ready to reject the US proposal to resolve the decade-long nuclear dispute, saying it does not meet Tehran's interests or change Washington's position on uranium enrichment.
A fire in Alberta, Canada, caused a temporary disruption in oil and gas production, raising further concerns about supply. Meanwhile, OPEC+ decided to keep its July production increase at the same level as in the previous two months, easing concerns about oversupply.
Last week, OPEC+ decided to increase its combined production by an additional 411,000 barrels per day. The decision was made following expectations of a more significant increase that had affected energy stocks ahead of the group's latest meeting.
The increase was less than expected, which had a positive impact on prices, which continue to rise.
For investors in the oil sector, the worst fear is a possible repeat of a price war like the one in 2020, which led to a drastic collapse in oil prices.
This scenario is unlikely, as the US cannot afford an oil price below $50. In fact, $50 represents the break-even point for the oil sector. This situation is leading the US and Saudi Arabia towards a more cautious approach, which is why the expected significant increase in oil production did not occur last week.
A further positive sign for oil prices emerges from the analysis of the futures curve, which is currently in backwardation. Backwardation is a condition in which forward prices are lower than the current spot price, resulting in a downward slope of the forward curve. As the contract expiry date approaches, the differential between the spot price and the forward price tends to narrow, causing the curve to converge back towards the spot price.
The conditions of the futures markets are:
Normal market (contango): balanced supply and demand.
Weak demand and excess supply: amplification of contango.
Excess demand: reduction in contango to backwardation, where the difference between the near and far prices can theoretically increase indefinitely.
The recent rises, supported by above-average volumes, indicate that only exceeding the 200-period moving average could trigger a strong long trend with a target of $70 per barrel.
Recent geopolitical tensions suggest the possibility of a bullish move on oil. Iran has increased its stockpiles of enriched uranium to near weapons-grade levels in recent months, raising further doubts about the possibility of reaching an agreement with the US on Tehran's nuclear program.
Sanctions and restrictions on global oil supply will favor an increase in prices. Tensions between Russia and Ukraine continue, with mutual attacks instead of negotiations. We expect oil prices to be around $70 in the next quarter.
