With multiple fundamental factors providing support, has the turning point for oil prices arrived?

Recently, the international crude oil market has exhibited a series of complex and volatile dynamics, with price movements showing a dual characteristic of short-term strength and medium-to-long-term pressure under the interplay of multiple factors.Since June, although the overall increase in oil prices has been limited, the continuous upward trend has drawn widespread market attention. Now that the market has fully digested the earlier expectations of an OPEC+ production increase, can the sustained rally truly shift the prevailing pessimism or alter the medium-to-long-term outlook?

Short-Term Bullish Factors Support Oil Price Rebound

The recent resilience in oil prices is primarily driven by three short-term bullish factors:

First, escalating geopolitical tensions in the Middle East have become a key driver. According to reports, Iran has rejected a draft agreement proposed by the United States, reigniting tensions between the two countries. The confrontation between Israel and Iran has further intensified market concerns over potential supply disruptions. This geopolitical premium is estimated to add an implicit risk premium of approximately $3–5 per barrel to Brent crude prices.

Second, improving macroeconomic expectations have boosted market confidence. Senior-level economic and trade talks between China and the United States have recently resumed, with both sides sending positive signals that suggest a potential easing of trade frictions. JPMorgan analysts point out that if tariff barriers between the two countries are reduced, global daily crude oil demand could increase by more than 300,000 barrels, providing strong support to the market during the current peak consumption season.

Third, the actual pace of OPEC+ production increases has lagged behind expectations. OPEC+ announced it would raise output by 414,000 barrels per day starting in July—marking the third consecutive month of implementing its production increase plan, aimed at restoring a total of 2.2 million barrels per day to the market to compensate for years of supply cuts. However, the market interpreted the latest increase as falling short of expectations, as OPEC+ indicated future production hikes would be more cautious. The group’s main goal is to stabilize oil prices in the short term. According to the latest data from Morgan Stanley, the alliance only achieved about 60% of its planned daily production increase in May and June, as capacity constraints in some member countries limited supply growth.

Medium- to Long-Term Pressure Remains: Potential Shifts in Supply and Demand Dynamics

Although short-term factors are supporting oil prices, most institutions believe that the crude oil market still faces downward pressure in the medium to long term. On the supply side, OPEC+ has announced plans to gradually restore 2.2 million barrels per day (bpd) of production by September. Meanwhile, U.S. shale oil rig counts have increased for 12 consecutive weeks, with production in the Permian Basin expected to hit a record high in Q3. A report by Sweden's SEB notes that Saudi Arabia is pursuing a "mild price war" strategy by gradually increasing output to regain market share. According to the International Energy Agency’s (IEA) May oil market report, global crude demand in Q1 2025 is expected to decline from 990,000 bpd to 650,000 bpd due to economic headwinds and the rise of electric vehicles. Average demand is projected at 740,000 bpd for 2025 and 760,000 bpd for 2026. Notably, high oil prices have started to suppress demand: after U.S. gasoline prices exceeded $5 per gallon, vehicle travel dropped 3.2% month-on-month—marking the first seasonal demand contraction since the COVID-19 pandemic in 2020.

Market Tug-of-War Amid Divergent Institutional Views

There is a clear divergence in institutional views on oil price trends. Bullish institutions such as Zhuochuang Information argue that summer travel in the Northern Hemisphere will accelerate inventory drawdowns, projecting global crude inventories to decline by 1.5 million bpd in July. However, bearish institutions emphasize deteriorating fundamentals. Bank of America warns that if OPEC+ fully restores its remaining spare capacity, and Iran returns to the market (adding another 1.5 million bpd), oil prices could fall below $60 per barrel in Q4. The bank also highlights a key strategic shift from Saudi Arabia—no longer shouldering production cuts alone, but rather increasing output to squeeze out high-cost producers. This paradigm shift could reshape the global supply landscape.

Key Variables and Market Outlook

Over the next three months, investors should closely monitor four key variables:

1. Geopolitical Developments: U.S.-Iran negotiations and the Russia-Ukraine conflict remain the biggest uncertainties. According to Goldman Sachs, stricter Western sanctions on Russian energy could immediately cut global supply by 2%. If Iran resumes exports, it will take at least six months to reach pre-sanction levels.

2. OPEC+ Policy Direction: The July 6 production meeting will be crucial. Internal divisions within OPEC are evident: Russia advocates pausing production hikes to assess impacts, while Saudi Arabia pushes for continued increases. UBS believes actual increases may once again fall short of targets, as countries like Angola and Nigeria are already unable to boost output.

3. Demand Verification Period: EIA data shows U.S. refinery utilization rates have risen to 93%, yet refined product inventories are rising instead of falling—raising concerns about a “weak peak season.” Inventory changes over the next 6–8 weeks will be critical in gauging real demand strength.

4. U.S. Production Forecasts Revised Down for First Time Since 2021: Trump’s energy strategy has focused on boosting production to suppress prices, but weak oil prices have impacted output. EIA notes that the number of active drilling rigs, as reported by Baker Hughes, declined more than expected last month. As of last week, there were 442 rigs drilling for oil in the U.S.—50 fewer than the same time last year and the lowest since October 2021. Falling oil prices have led producers to cut capital expenditures, including drilling investments. The EIA now forecasts U.S. crude output to decline from a record 13.5 million bpd in Q2 this year to 13.3 million bpd by Q4 2026. Average daily production for 2025 is expected to slightly exceed 13.4 million bpd, while 2026 is projected to fall just below that. This marks the first time since 2021 that the EIA has revised its production outlook downward. Whether Trump will introduce new energy policies in the second half of the year remains a key source of market uncertainty. $Occidental(OXY)$