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Rising Crude: Fear or Greed Factor?

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Rising Crude: Fear or Greed Factor?
Crude prices rose to the highest they’ve been in two months this week. Headlines were quick to point to Hurricane Beryl, which is in the southern Caribbean. It’s the largest storm (Category 5) to be recorded this early in the season. For now, it doesn’t appear to be threatening oil production in the Gulf. But the unusually strong storm and warm waters of the Atlantic have raised concerns this could be a particularly active hurricane season.

But crude prices have been on the rise all month, long before the hurricane appeared. So, it might add to the trend, but it certainly isn’t the cause. Dwindling US inventories through the period, and also a weaker dollar likely also had something to do with it as well. So, where do things go from here?

Who Gets the Credit

US fossil fuel production has been diminishing lately, with fewer and fewer drilling rigs in operation. This was partly due to lower crude prices earlier in the year. The expectation that less fuel will be needed in the future has led many producers to cut back on exploration. As a result, existing assets are getting pumped down, and when they are exhausted, there are fewer to replace them.

With US data generally coming in softer than expected, there are concerns that the world’s largest crude consumer will have less appetite this summer. That was particularly the case after US Q1 GDP figures disappointed, followed by a glut in demand during the spring. Even though US producers hit record production last year, they haven’t been stockpiling for summer sales as much as in previous years. That contributes to a narrowing in the supply and demand, and has supported prices.

Will It Resolve

The continuing tensions in the middle east also got more intense this month, with worries that Israel and Lebanon could go to war again. The potential of more supply disruptions added to increased demand as some places tried to front-load orders. But, that situation seems to be cooling down. For now.

The issue is that there is a delay between price action and when increased (or decreased) crude supplies come to the market. Small amounts of crude can be increased in a matter of days. More than a couple hundred thousand barrels per day takes weeks if not months to bring to market. And with demand being somewhat choppy due to unpredictable things such as the weather and geopolitics, producers are having trouble tying their supply.

The Long Term Trend Is There

While momentary expectations of increased demand (greed) or concerns over a flare up in geopolitics (fear) can put the price of crude on a bit of a rollercoaster, the consensus is still that there will be a supply crunch. That is, unless there is a recession that will drastically reduce demand.

Analysts generally agree that production is not keeping up with demand, which keeps generalized upward pressure on crude prices. Timing will be key, though, as demand is expected to drop off at some point. Analysts just don’t agree when that is. Which makes figuring out where oil’s top will be an extra challenge.

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