Crude oil marked its second consecutive weekly gain despite a slight dip in prices on Friday. The rally was fueled by soaring gasoline demand, substantial inventory drawdown, and escalating geopolitical threats. Speculators have also become more constructive toward oil as we move into summer, while time spreads in backwardation signal supply tightness. WTI oil settled up 2.9% at $80.73 per bbl, while MCX crude oil closed at Rs 6,746 per bbl.

Catalyst Driving Crude Oil Prices

• Gasoline demand surge: Gasoline consumption in the U.S. has hit a post-pandemic high, reaching a staggering 9.4 million barrels per day last week due to heavy summer travel demand.

• Substantial inventory drawdown: Crude inventories surprisingly fell by 2.5 million barrels last week, while both gasoline and distillate stocks saw significant declines, illustrating strengthening demand across all fronts.

• Escalating geopolitical tensions: A bold Ukrainian drone strike on a Russian oil terminal has exposed vulnerabilities in energy infrastructure. Meanwhile, the Middle East remains volatile, with escalating conflicts between Israel and Hezbollah adding a risk premium to oil prices.

• Oil deficit forecast for 3Q 2024: Demand optimism in third quarter and restrictive supplies due to OPEC+ cuts will keep oil markets in deficit in 3Q 2024. All three of the main oil forecasting agencies — the International Energy Agency (IEA), the US Energy Information Administration (EIA) and the Organization of Petroleum Exporting Countries (OPEC) — expect oil demand growth in the second half of 2024 to be stronger than in the first half.

Outlook: A volatile week ahead for Crude oil, but the bias remains positive (MCX CMP: Rs 6,740 /bbl)

Crude oil may remain volatile in the week ahead due to a combination of price-supportive fundamentals and key macroeconomic data, including US GDP and the PCE index, which will guide bets on interest rates. However, summer travel demand is likely to play a pivotal role in driving prices upward post-data. Continued inventory drawdowns across crude, gasoline, and distillates will be crucial to watch for in Wednesday’s EIA weekly inventory data. Moreover, if geopolitical tensions escalate further, they could raise supply threats, thereby driving oil prices higher.

From a medium-term perspective, we remain supportive of the oil market, with a deficit over the third quarter poised to tighten the oil balance. WTI oil (CMP: 80.70) has formed a strong base around $77-78 levels (MCX Rs 6,450-6,520 per bbl), which may act as a robust support zone, while resistance is placed at $85-88 per bbl (MCX Rs 7,100-7,360 per bbl).