WTI was trading around $68.65 on Friday, up 0.30% on the session, as a softer US Dollar followed weaker US jobs data. US Nonfarm Payrolls showed 57K jobs added in June versus expectations of 110K, a miss that damped assumptions about further Federal Reserve tightening and offered mechanical support to USD-priced commodities such as crude.
Attention stayed on the Middle East as indirect US-Iran talks continued after discussions in Doha failed to secure a lasting deal, while Iran’s joint military command warned of a “decisive and swift response” to any US interference in the Strait of Hormuz. Commerzbank said the slide in oil has been driven by expectations of a future supply surplus rather than evidence of an already oversupplied market, and pointed to forthcoming Energy Information Administration forecasts alongside future OPEC+ production decisions as potential catalysts.
Tailwinds from Economic and Demand Data
We see the softer US jobs data as a significant tailwind for crude oil heading into the coming weeks. The weaker US Dollar makes oil cheaper for foreign buyers, and this mechanical effect should provide a solid floor for prices. Given the Federal Reserve is now less likely to tighten policy, this dollar weakness could persist.
The latest inventory data from the Energy Information Administration (EIA) this past Wednesday supports this view, showing a surprise draw of 4.5 million barrels. This contradicts the market narrative of a brewing supply surplus that has weighed on prices recently. This indicates that current demand is much healthier than the market has been pricing in.
Global demand signals also appear to be stabilizing, with the most recent global manufacturing PMI data for June ticking up to 50.8. This suggests industrial activity is in a slight expansion phase, easing concerns of a sharp economic slowdown that would hurt oil consumption. We believe the fears of a future supply glut have been overstated relative to the actual data.
OPEC+, Geopolitics, and Market Positioning
With the next OPEC+ meeting scheduled for the second week of July, we anticipate the cartel will be motivated to support prices after the recent decline. The current price level near $68 is well below the fiscal breakeven points for many key producers, including Saudi Arabia. We expect rhetoric from the meeting to be aimed at preventing further price drops, with a surprise production cut remaining a distinct possibility.
The ongoing tensions in the Middle East, particularly concerning Iran and the Strait of Hormuz, are not fully priced into the market. This geopolitical risk represents a significant source of potential volatility and provides a reason to own upside exposure. We feel that derivative markets are underappreciating the chance of a supply disruption that could cause a rapid price spike.
Historically, WTI prices in the high $60s have represented a strong support zone, especially when compared to the $80-$100 range seen in recent years. This suggests the market has over-corrected, presenting an opportunity for traders. We are positioning for a rebound by using options to gain upside exposure while clearly defining our risk.
