Crude and Brent Reach Double-Digit Gains in July

July was a strong month for oil, both crude and brent, as demand in China peaked along with stronger-than-expected US summer demand. Will the trend continue?

Shrinking Supply

OPEC+ will meet on Friday, but the most important news is already out: Saudi Arabia confirmed on Thursday that it would extend its voluntary production cuts for another month. That was a widely expected move but still helped support crude prices after the US DOE reported a record drawdown of inventories for the final week of July. The US saw a surge in demand for gasoline at the start of summer, as the driving season seems to have gotten off to a slower-than-expected start.

Around the middle of July, it was reported that US shale production is expected to have peaked last month and will be declining going forward. This adds to growing concerns over energy supply as chronic underinvestment worldwide, coupled with a move away from Russian sources, has left very little room to increase production. Without renewed investment, production of existing facilities will decline by around 8% yearly.

Rising Demand

Meanwhile, investors are reassessing the outlook for demand. The IEA still sees China potentially driving a surge in demand. OPEC members concur. Other analysts are not so sure, as Chinese demand has been slower than expected, and industrial production figures have disappointed recently. However, the weakness in Chinese demand has been more than offset by the US, where increasingly investors expect the world's largest economy and crude consumer to avoid a hard landing.

This leaves intact projections that crude demand would outstrip supply later in the year, supporting the case for crude prices to keep rising. In July alone, crude rose from $69.79 to $81.80 per barrel - a 17.20% gain, with brent a little behind at 14.45%. But some analysts are a little more skeptical, saying the recent surge in demand could be seasonal, with demand reducing later in the autumn. Meanwhile, the higher prices in crude have left the US delaying once again the replenishment of its strategic reserves (SPR). Recent earnings reports have left the market optimistic, as over 80% of companies have beaten analyst forecasts. But, the possibility of a recession later in the year can't be completely ruled out, which could suddenly reverse the fortunes of crude prices.

Major Resistance Ahead

Crude oil broke past a major hurdle in July, ditching $75 for a chance at $86.40 per barrel - the measured-move projection. If bulls can reclaim $83.40 in the immediate aftermath of a move past $82.40 per barrel, chances of reaching the target will increase. Conversely, losing $77.15 in the event of weakness under $78.70 per barrel might open the door to $73.80, exposing lower levels with the return into the prior range.

Source: SpreadEx Light Crude

Key Takeaways

In July, oil prices saw significant gains due to strong demand in China and the US, but several pain points remain. The oil supply is shrinking due to declining US shale production and underinvestment worldwide. There are concerns about the energy supply due to a shift away from Russian sources. Uncertainty surrounds rising demand, with doubts about Chinese demand and the potential for a recession later in the year. Analysts are skeptical about the recent surge in crude prices, suggesting it could be seasonal and may diminish in the autumn.