Will oil fall to $60?

Tensions
in the Iran-Israel conflict have eased, and the oil market has largely avoided
any significant supply disruptions. On top of that, the IEA doubled down on its
mid-June forecast that demand will stabilize by the end of the decade. Given
all this, it’s no surprise that oil
prices have dropped back below $70.

This is
only good news for oil-importing countries, since lower prices mean lower
spending and greater economic benefit. But for exporters, the opposite is true.
Naturally, one would have expected OPEC+ to take steps to boost prices again,
for example by keeping production stable at its July meeting.

But the
complete opposite happened: contrary to logic, the cartel not only increased
the number of barrels produced per day, but to a higher figure than many had
expected: 548,000 barrels per day, instead of the 411,000 previously planned.
In addition, another equal increase could be announced for September.

It might
be thought that this has been done to discipline members such as Kazakhstan,
which have been exceeding their production quotas. And it would make sense if
oil prices were to fall as a consequence, but the complete opposite happened:
after an initial decline, a barrel of Brent rose to $69 a barrel on Monday.

As for
the stock market reaction, indexes including the S&P 500 and the Nasdaq
went red on Monday. But it was not due to fears that rising oil prices would
fuel inflation and slow the Fed’s
path of rate cuts. Rather, the drop came on
disappointing news about tariff negotiations with South Korea and Japan.

Why was
this decision made, and why did prices rise?

Starting
with the first question: according to OPEC+, the decision to increase
production was based on a “stable global economic outlook and currently healthy
market fundamentals”. But it is unclear where this optimism comes from, given
that major trade disputes remain unresolved and the Fed is in no hurry to cut
interest rates.

As for
the second question, prices may have risen in response to Saudi Aramco’s $1 per
barrel increase in its Arab Light crude, which puts it $2.20 above the regional
benchmark for Asian buyers. Hopes for progress in trade negotiations may also
have played a role. If so, the basis for further price rises looks rather
shaky.

Thus,
logic suggests that prices are likely to fall unless a new geopolitical crisis
hits a region critical to oil supply.

The
continued decline in the number of active drilling rigs in the United States,
despite Donald
Trump’s calls to “drill, baby, drill,” also suggests that shale
producers are not feeling bullish about the market. As for investment bank
analysts, many expect oil prices to fall back toward $60 per barrel in the
fourth quarter.

But, as
always, the market may still hold some surprises.