Oil falls amid trade tensions, inventory surge; analysts see potential upside

Though oil prices have gained this week, the commodity is likely to remain rangebound for the foreseeable future as the market assesses several fundamentals. 

Oil prices declined on Thursday, influenced by two key factors: US President Donald Trump's push for a quick end to the Ukraine conflict through additional tariffs, which raised concerns about supply risks, and an unexpected increase in US crude inventories reported on Wednesday.

At the time of writing, the price of West Texas Intermediate crude oil on the New York Mercantile Exchange was at $69.79 per barrel, down 0.3%. Brent crude oil on the Intercontinental Exchange was at $72.17 a barrel, down 0.4% from the previous close. 

Trade war

Despite the looming August 1 tariff deadline, the EU and the US have reached a trade agreement. 

The White House states that this deal will strengthen America's economy and manufacturing.

By 2028, the EU is committed to purchasing $750 billion in US energy and investing an additional $600 billion in the US. 

While a 15% tariff will be imposed on European exports to the US, existing sectoral tariffs on steel, aluminum, and copper will remain unchanged.

“However, President Trump’s decision to reduce the deadline for Russia to agree to a peace agreement with Ukraine from 50 days to 10-12 days may have also spooked market participants about possible supply chain constraints,” FXstreet said in a note. 

Concerns about potential oil supply limitations have contributed to the recent increase in oil prices. These worries stem from the US threat of sanctions against Russia and the possibility of secondary tariffs, up to 100%, on countries that continue to import Russian crude.

“Should Russia fail to comply, Mr. Trump has warned of imposing secondary sanctions on major purchasers of Russian crude oil, specifically China and India,” said David Morrison, senior market analyst at Trade Nation, adding that oil prices got support from this.

US stockpiles

US crude oil inventories saw a significant increase of 7.7 million barrels last week, according to weekly data from the Energy Information Administration, which presented a largely bearish outlook.

Crude oil exports saw a significant decline of 1.16 million barrels per day week-on-week, reaching their second-lowest point since August 2023.

This drop was the primary cause of the overall weakness.

Gasoline inventories of refined products decreased by 2.72 million barrels, whereas distillate fuel stocks saw an increase of 3.64 million barrels.

“This will help ease concerns over tightness in the middle distillate market with stocks now above levels seen at the same stage in 2022,” Warren Patterson, head of commodities strategy at ING Group, said in a note. 

Outlook

WTI's price exhibits an upward trend, leading us to adopt a bullish outlook, according to FXstreet. 

“Yet, we would not be surprised at all to see oil’s price moving to test our 67.60 (S1) support level,” FXstreet said. 

Front-month WTI crude oil has experienced a positive week, climbing approximately 8%. From $65 a barrel last week, it reached just over $70 on Wednesday, marking a five-week high.

Brent oil also rose to more than a month’s high to $72.82 a barrel on Thursday. 

Earlier this week, crude broke out of the top end of its recent trading range, setting the scene for higher prices. 

“But oil has had many false upside breakouts, so the bulls will be on their guard.” Trade Nation’s Morrison said.